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Core Lithium Limited - Case Study
Written: 14 October 2023
In this case study, we are taking a look at one of the market's lithium darlings. The company built up its flagship Finniss Lithium Project over the last few years and recently delivered its first full-year profit. This is an impressive achievement, and as the Northern Territory's first lithium miner, it has opened up the region to additional mining/exploration investment. Nevertheless, the journey hasn't been cheap, with numerous funding rounds totaling ~$350 million over the years to support the development, which has also not been without delays.
Despite these turbulences, the transition from developer to a profitable miner may offer investors additional predictability into the company's performance and give management a stable platform to grow from. Let's have a look to see if Core is, in fact, a 'Triple Threat'.
Threat 1: Equal capital raise access
Most fast-growing companies require additional investor support to prove their asset potential and reach a sustainable revenue-generating state. These injections of capital often require a discount to make the transaction attractive, which means that existing shareholders not only have their ownership diluted but also suffer from a share price drop.
Although this is unfortunate, it is nevertheless standard for listed companies. What management can do to ensure this process does not disproportionately punish existing shareholders is to prioritize their participation and not only accept external money.
For Core, we can see that over the last 3.5 years, there have been 4 capital-raising transactions.
Although this is unfortunate, it is nevertheless standard for listed companies. What management can do to ensure this process does not disproportionately punish existing shareholders is to prioritize their participation and not only accept external money.
For Core, we can see that over the last 3.5 years, there have been 4 capital-raising transactions.
- 4 Feb 2021: $40m placement at $0.25 per share + 1:2 $0.45 option (link)
- 9 Aug 2021: $91m placement at $0.31 per share + $15m SPP (link)
- 30 Sep 2022: $100m placement at $1.03 per share (link)
- 16 Aug 2023: $100m placement at $0.40 per share + $20m SPP (link)
As we can see, only 2 of the 4 raises have an SPP or EO component to facilitate existing shareholder participation, with the other two solely offered to sophisticated (and likely external) investors.
It is also worth noting that the 4 Feb 2021 raise didn't have an associated shareholder offer, yet offered external investors 1:2 options. Those options would have been heavily in the money at the 30 Sept 2022 raise price of $1.03. In other words, for every $1 invested at that point, by 30 Sept 2022, the free options alone would have been worth $1.16.
We can also examine the dilution impact below based on a hypothetical 500,000 shareholding at the start of 2021:
It is also worth noting that the 4 Feb 2021 raise didn't have an associated shareholder offer, yet offered external investors 1:2 options. Those options would have been heavily in the money at the 30 Sept 2022 raise price of $1.03. In other words, for every $1 invested at that point, by 30 Sept 2022, the free options alone would have been worth $1.16.
We can also examine the dilution impact below based on a hypothetical 500,000 shareholding at the start of 2021:
Date
Pre raise share holding
EO/SPP take up
Post raise share holding
Total SOI post raise
Ownership
12 Jan 2021
500,000
-
-
1,002,430,321
0.0499%
4 Feb 2021
500,000
0
500,000
1,164,437,321
0.0429%
9 Aug 2021
500,000
96,774
596,774
1,547,909,928
0.0386%
30 Sep 2022
596,774
0
596,774
1,834,282,735
0.0325%
16 Aug 2023
596,774
75,000
671,774
2,136,935,544
0.0314%
Things to note, we're assuming full subscription rounded down to the nearest share. Total shares on issue post raise is actual figures and includes raises that weren't fully subscribed.As we can see, the exclusion of existing shareholders in half of these raises has led to a big ownership dilution. Should existing shareholders been offered a SPP or EO in all raises, the ownership percentage would likely have stayed more consistent.
About equal capital raise access
Threat 2: Director on-market buying
Having directors who have committed their own cash to acquire shares in the business is usually a great sign that insiders are expecting future share price appreciation. Seeing this dynamic allows us to have more faith that things are going well.
However, when insiders/directors begin selling shares, it can be a cause for concern as it may show that most of the share price gains have already been generated. Although it is usually understandable for early directors to realize some profit, we must keep an eye out for significant or complete sell-offs.
Core has generated some impressive shareholder returns over the last few years. This has not only delivered significant profits for shareholders but also for directors. If we analyze director trading from FY22 onwards, we can get a picture of their net holdings change.
Stephen Biggins
However, when insiders/directors begin selling shares, it can be a cause for concern as it may show that most of the share price gains have already been generated. Although it is usually understandable for early directors to realize some profit, we must keep an eye out for significant or complete sell-offs.
Core has generated some impressive shareholder returns over the last few years. This has not only delivered significant profits for shareholders but also for directors. If we analyze director trading from FY22 onwards, we can get a picture of their net holdings change.
Stephen Biggins
- 3 Nov 2021: Sold 5,000,000 shares for $2,901,980.25 (link)
- 10 May 2022: Bought 5,000,000 shares via option conversion for $300,000 (link)
- 10 May 2022: Sold 7,328,679 shares for $8,278,020.01 (link)
Malcolm McComas
- 15 Nov 2021: Bought 2,000,000 shares via option conversion for $120,000 (link)
- 15 Nov 2021: Sold 2,000,000 shares for $1,119,942.04 (link)
- 16 Dec 2022: Bought 3,000,000 shares via option conversion for $180,000 (link)
- 16 Dec 2022: Sold 800,000 shares for $837,581.08 (link)
- 22 Sep 2023: Bought 75,000 shares for $30,000 (link)
Malcolm McComas
- 11 Nov 2022: Bought 2,000,000 shares via option conversion for $120,000 (link)
- 11 Nov 2022: Sold 600,000 shares for $1,019,500 (link)
- 16 Dec 2022: Sold 300,000 shares for $311,280.45 (link)
- 28 Mar 2023: Sold 800,000 shares for $732,788.45 (link)
- 18 Apr 2023: Bought 3,000,000 shares via option conversion for $180,000 (link)
- 22 Sep 2023: Bought 75,000 shares for $30,000 (link)
Heath Hellewell
- 3 Jan 2023: Bought 5,000,000 shares via option conversion for $300,000 (link)
- 22 Sep 2023: Bought 75,000 shares for $30,000 (link)
Andrea Hall
- 22 Sep 2023: Bought 75,000 shares for $30,000 (link)
As we can see, there have been a few purchases of stock, usually through option conversions at low prices. Yet this is vastly outweighed by disposals of stock. In fact, over the period, directors of Core Lithium have collectively sold $13,881,092.23 worth of stock net of purchases.
Pricing can be broken down into:
Pricing can be broken down into:
- Average purchase price: $0.065
- Average sale price: $0.90
This trading behavior likely indicates that directors believe that the bulk of the capital gains are behind them, and judging by their average sale price of $0.90 in comparison to the recent capital raise price of $0.40, they have timed their partial exit very well. From an investor's perspective, this is usually a bad sign, as it is often unwise to buy when insiders are selling.
About director on-market buying
Threat 3: Setting goals
Setting goals and following up on their progress is an essential quality for any listed company. This is even more important for a growth business where changes in the environment can have a material impact on the risk profile of shareholders' investments.
As we previously mentioned, it is perfectly fine to set goals and alter them later on. Yet, changes in the goals should be acknowledged by management, and ideally, a reason should be given. This way, investors stay informed and are aware of management decision-making.
To examine this threat for Core, we must look back over the last two years and compare goals achieved with goals outlined at the start of the period. For this analysis, we are looking at the investor presentation from October 27-28, 2021, which was the first deck released after the approval of the Finniss project FID.
As we previously mentioned, it is perfectly fine to set goals and alter them later on. Yet, changes in the goals should be acknowledged by management, and ideally, a reason should be given. This way, investors stay informed and are aware of management decision-making.
To examine this threat for Core, we must look back over the last two years and compare goals achieved with goals outlined at the start of the period. For this analysis, we are looking at the investor presentation from October 27-28, 2021, which was the first deck released after the approval of the Finniss project FID.
In the presentation, a few other representations of note were made:
- Stage 1 development was fully funded
- First production Q4 2022
Let's examine their stage 1 goal achievements now:
Goal
Estimated Date
Achieved
Notes
Offtake and finance
By end 2021
✅
Ganfang offtake secured on 22 October 2021 (link) which adds to the Yahua contract in place. $150m equity raised.
FID
By end 2021
✅
30 September 2021 (link)
Construction starts
By end 2022
✅
Achieved 26 October 2021 (link)
Construction ends
Q4 2022
❌
Construction of the DMS plant completed on 27 Feb 2023 (link)
First concentrate production
Q4 2022
❌
Delayed without explanation to H1 2023 when first mentioned on 29 Sept 2022 (link). Instead added the first shipment of DSO ore by this date.
As we can see, the company was able to achieve some of the earlier goals outlined. Yet, the two key goals of finishing construction and first concentrate production were delayed without a proper explanation.
Furthermore, due to the delays, Core completed two additional capital raises despite stating the project was fully funded in late 2021. These are major goals that were not fulfilled.
Looking forward, it seems the company has also scrapped any mention of production expansion or hydroxide production. Instead, the company seems focused on exploration to extend the project's mine life. Although this strategy change is perfectly normal, the lack of a clear explanation is not ideal.
About setting goals
Furthermore, due to the delays, Core completed two additional capital raises despite stating the project was fully funded in late 2021. These are major goals that were not fulfilled.
Looking forward, it seems the company has also scrapped any mention of production expansion or hydroxide production. Instead, the company seems focused on exploration to extend the project's mine life. Although this strategy change is perfectly normal, the lack of a clear explanation is not ideal.
My concluding thoughts
Core Lithium has achieved a great deal in the last 3 years. From defining a lithium resource to building the Northern Territory's only lithium mine, shareholders have benefited from this transition. Yet, upon our examination of the company, there are a few areas of concern. Specifically, it looks like directors have begun moving to the exits by selling most of their holdings. In addition, the company has not had a great track record of owning up to its goals and ensuring shareholders are equally represented in all capital raises.
Because of these considerations, we do not believe Core Lithium to be a rare Triple Threat.
Core Lithium has achieved a great deal in the last 3 years. From defining a lithium resource to building the Northern Territory's only lithium mine, shareholders have benefited from this transition. Yet, upon our examination of the company, there are a few areas of concern. Specifically, it looks like directors have begun moving to the exits by selling most of their holdings. In addition, the company has not had a great track record of owning up to its goals and ensuring shareholders are equally represented in all capital raises.
Because of these considerations, we do not believe Core Lithium to be a rare Triple Threat.
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