Wesfarmers’ WA lithium project won’t make money this year

Wesfarmers’ Covalent lithium project won’t make money this year, but the company remains confident the battery mineral is a good long term bet.

Lithium prices have fallen off a cliff over the past year.

Wesfarmers’ $892m Covalent lithium project in Western Australia will produce its first concentrate for sale in the current half, but won’t generate any profit for the company in the period as the faltering price for the commodity takes its toll.

Wesfarmers owns a half stake in the project at Mt Holland, and said its share of spodumene concentrate production in the first half of the calendar year would be about 50,000 tonnes.

UBS analysts in December downgraded the expected 2024 financial year profit from Covalent to $9m, from $72m previously, but Wesfarmers on Thursday said there would be no positive earnings from the project in the current period.

Wesfarmers spent $164m on the project in the first half, bringing its total development expenditure at Mt Holland to $892m.

“Following the successful commissioning of the concentrator at Mt Holland, operations are now in ramp up and Wesfarmers’ share of spodumene concentrate production in the 2024 financial year is expected to be approximately 50,000 tonnes,’’ the company said.

“Spodumene concentrate sales volume for 2024 will be dependent on commercial factors including the prevailing spot price, but at current spodumene prices sales will not contribute positive earnings during the 2024 financial year due to the higher cost of production while volumes ramp up towards full capacity.’’

The company said over the longer term however, it was confident the project would generate good returns.

“The high quality of the Mt Holland deposit is expected to enable the integrated Covalent lithium hydroxide project to operate with an attractive relative cost structure and support satisfactory long-term shareholder returns,’’ Wesfarmers said.

Wesfarmers managing director Rob Scott said the company had always expected a degree of price volatility “given that the lithium market is a fairly immature market’’.

“We were really clear when we invested in Mt Holland and the Covalent lithium project that it was a long-term investment that attracted us to the business,

“It was not only the long term growth fundamentals but particularly the opportunity to acquire a very high-grade long-life mine. A very unique, global asset together with having an integrated concentrator and refinery really leveraging our processing and manufacturing capabilities.

“Our relative cost structure should continue to be very favourable, and we’re also seeing very strong interest in demand for hydroxide produced by Australia. So overall, the project’s going well.’’

The Covalent operation has offtake agreements with “tier one auto and battery customers”, Wesfarmers said.

“Good progress continued on construction of the Kwinana refinery, which was approximately 65 per cent complete as at the end of the period,’’ Wesfarmers said.

Prices for Australian-produced spodumene peaked at more than $US8000 per tonne in the final quarter of 2022, before falling to about $US850/t in early 2024 as supply outpaced demand growth from the electric vehicle sector.

The Wesfarmers chemicals, energy and fertilisers (WesCEF) division’s earnings were down 47 per cent on the previous corresponding period, which Jarden analysts said was about 10 per cent below consensus, impacted by commodity prices.

Originally published as Wesfarmers’ WA lithium project won’t make money this year