IGO moves to reassure shareholders it won’t waste nickel cash

IGO says it will return nickel cash to shareholders, with organic growth – not more M&A – its next priority.

IGO says it won’t use the cash being thrown off by its profitable WA lithium assets for more forays into the M&A market, saying it will focus on shareholder returns and paying down debt in the wake of its disastrous $1.25bn acquisition of Western Areas.

IGO finished June with a war chest worth $775m, and in a net cash position of $415m after its share of Tianqi’s WA lithium operations delivered a record $423m quarterly dividend to its coffers.

But the company still needs to spend up to another $485m on building its Cosmos nickel mine, according to its previous disclosures, after $338m was spent on the project over the last financial year.

IGO said in mid-July it will write down the value of the assets acquired through its takeover of Western Areas – the operating Forrestania nickel mine in the South West of WA, and the Cosmos development project – by $880m-$980m in its August annual accounts.

That is likely to effectively write their value down to nothing, given the $1.25bn takeover came with $152m when shareholders signed off on the deal, along with a 20 per cent stake in fellow WA nickel miner Panoramic worth about $102m at the time.

Cosmos is still under review, but IGO has said it expects the total cost to almost double from the $425m included in the takeover documents.

IGO will return nickel cash to shareholders, with organic growth – not more M&A – its next priority. Picture: Kim Chrisitan/AAP Image

The company moved to reassure shareholders it is not planning to waste the benefits of its 2020 deal to buy a half-share in Tianqi Lithium’s WA assets for $1.9bn, which include a stake in the massive Greenbushes lithium mine and a lithium hydroxide refinery south of Perth.

IGO said on Monday it had introduced a new capital management policy in the wake of the Western Areas debacle, promising to pay out 20 to 40 per cent of its underlying free cash flow in dividends when it has less than $1bn in available liquidity, and more when its cash balance grows.

The rest of the free cash will be used to invest in its existing operations, pay down debt and take advantage of growth options already within its existing portfolio.

It will use debt or equity – as it has traditionally done – to fund any future forays into the merger and acquisition market.

High lithium prices over the last few years mean the Tianqi lithium buyout has more than offset the disastrous acquisition of Western Areas, with the bulk of the $1.1bn in debt taken to fund the Tianqi buy now paid off, and the operations still delivering strong cash returns despite falling lithium prices.

IGO’s existing Nova nickel mine delivered $118m in free cash flow for the June quarter, with the sale of its stake in Mincor – taken over by Andrew Forrest’s Wyloo Metals in the period – with another $53m. But the bulk of the company’s cash build came from the $423m

Tianqi dividend. IGO said its share of the joint venture delivered almost $1.2bn in dividends for the full financial year.

But IGO said the ramp-up of Tianqi’s Kwinana lithium refinery is still struggling, with the plant’s output plunging 85 per cent to 142 tonnes in the June quarter due to troubles returning from a major maintenance shutdown.

IGO said the refinery is now operating at about 20 per cent of its nameplate capacity, and it does not expect it to ramp up to operating volumes of half of its total capacity until the end of the year.

Citi analyst Kate McCutcheon said IGO’s lithium assets had delivered better returns than expected, but concerns lingered over the contribution from its nickel mines.

“While the bulls would like to look through nickel — lithium is now 90 per cent of net asset value after all — we think there’s uncertainty over what the business could look like at the end of the year, with a new CEO incoming in late in the fourth quarter,” she said in a client note on Monday.

“Modest-margin Western Areas nickel also continues to consume cash – $100m in the quarter.”

IGO shares fell 4.6 per cent to $13.80 in a flat market on Monday.

Originally published as IGO moves to reassure shareholders it won’t waste nickel cash