Core Lithium (ASX: CXO) (OTCPK: CXOXF) shares are up 20% on the announcement of the first annual profit. CXO shares quite possibly should be up on this too - that step change from a development miner into one actually producing with a positive cashflow is an important one. It’s even possible to chortle a bit given the pain this will cause the short sellers. After all, some 8% of the Core equity is out on loan to the shorts. However, that so much of the equity is short should make us stop and think for a moment. Why are so many short? Agreed, the short position is down at Core Lithium, but still.
The announcement: “First spodumene concentrate produced (18,274dmt) and shipped (5,423dmt) from Finniss Operations. Post year-end, 23,100dmt of spodumene concentrate and 15,000dmt of lithium fines were shipped to customers. • Finniss Mineral Resource estimate increased by 62% to 30.6Mt @ 1.31% Li2O, including the BP33 Mineral Resource estimate of 10.1Mt @ 1.48% Li2O. • Maiden revenue of $50.6 million EBITDA of $14.0 million and Net Profit After Tax of $10.8 million. Operating cash flow of $90.8 million.” Well, yes, that’s a good operating performance. However, as with Pilbara Minerals, which also has a large short position against it, it is also true that the lithium price has been declining this past 9 months. Down 75% in fact from its peaks. Prices for shipments next year aren’t going to be as high as these historical numbers.
Core Lithium share price from Google Finance
After that base thing about the market price for production we’ve one more problem that we can’t seem to find an answer for. The full annual report isn’t entirely clear on this. It’s possible that we are mistaken on this but our problem with Core Lithium: “As we explained elsewhere about Core Lithium: “Well, the effect of such a contract is that if the price soars after the contract has been signed then the price cap means that it's the processor, not the mine, gaining the value of the soaring price. So, it matters hugely - given the lithium price volatility - what the cap and collar on that offtake contract is. Which is something that Core doesn't tell us but we can have a little guess at likely ranges.
Note this is a guess. An informed one but no more than that at all. The offtake contract - with the cap and collar, recall - was signed in early 2021. When the lithium price, therefore the lithium concentrate price, was at a very low level. And that, I think, is the story of why Core Lithium seems not to have benefitted much from soaring lithium prices. Because much of its production is presold at pre-soaring prices.”
The shipments already made they reveal are at current market prices. But they’ve not told us about any cap and or collar on those long term offtake contracts. Which is the thing we worry about. Which means we’re just not sure about the medium term at all.