It has become a common story from Australia’s growing lithium mining and processing sector – the start-up deadline set for first production from a major project such as a mine needing to be pushed back because of headwinds such as rising inflation, costs or both, and labour shortages.
So it was on Wednesday when Wesfarmers (ASX:WES), which jointly owns the emerging Mount Holland lithium project in Western Australia with Chile’s SQM, said production of lithium hydroxide will be delayed by around six months while costs jumped and pushed the value of the mine and plant to well over $2 billion.
Other WA plants owned by Albemarle, Mineral Resources and IGO have run into similar headwinds in their developments, as have mining projects in WA such as Liontown’s main investment – its Kathleen valley mine.
These problems are why many analysts warn that the expected surge in the supply of spodumene and then lithium-based battery chemicals will not happen overnight and will in fact be a more drawn-out affair.
This is actually good news for companies like Albemarle and IGO, as well as the likes of Pilbara Minerals and Mineral Resources because there will be a longer window of opportunity for them to sell into.
The delay to the Kwinana plant, which will produce chemicals used in the fast-growing electric vehicle battery sector is due to labour shortages, refinery engineering delays and supply chain problems in the wake of COVID shutdowns that have impacted the delivery of key equipment.
“While labour availability and supply chain constraints have been well managed by Covalent, these pressures together with refinery engineering delays and COVID-related restrictions affecting the delivery of key capital items sourced from offshore have impacted cost and timing expectations for the project, including completion of the Kwinana refinery.
That has pushed up overall costs for the project by up to 20%, according to Wesfarmers.
Wesfarmers’ share of costs for the project is now seen at between $1.2 and $1.3 billion, up from $1.09 billion (and $950 million when originally announced several years ago).
“First production of lithium hydroxide at Kwinana is now expected in the first half of the 2025 calendar year, around six months later than previous guidance but with the impact of the delay expected to be partially offset by the early sale of spodumene concentrate during the 2024 calendar year,” Wesfarmers said in its December half year report yesterday.
But a tiny bit of good news “Construction of the mine and concentrator at Mt Holland is well advanced, with first earnings for the project expected in the first half of the 2024 calendar year as sales of spodumene concentrate ramp up,” Wesfarmers reported.
Wesfarmers also said the group was assessing options to expand capacity of the mine and concentrator.
The Covalent lithium project owns the Mount Holland mine and concentrator around 500 kilometres (310 miles) east of Perth, and the Kwinana refinery in Perth, and plans to produce 50,000 tonnes of lithium hydroxide a year once complete.
Earnings-wise, Wesfarmers has lifted its dividend by 10% (better than inflation) after its main retail chains of Bunnings, Kmart and Target delivered solid sales and profits, although its online marketplace Catch was again a big disappointment this time reporting a loss of $108 million.
WES reported a 14.1% jump in first-half net profits to $1.38 billion, with CEO Rob Scott saying the group’s stores, which include Officeworks, Bunnings and the Kmart/Target Group, had booked strong performances over the past six months as cost-of-living pressures on households saw consumers shifting to value-oriented retailers like its key chains.
Wesfarmers lifted interim dividend to 88 Australian cents per share, up from 80 cents in the prior half year period.
The news saw Wesfarmers shares rise 1.3% to $49.35.
Group revenue rose 27% to $22.5 billion, though revenue rose 11% if the newish Wesfarmers Health business is excluded. Earnings before interest and tax rose 13% to $2.16 billion
Impressively, revenue in its department store group (Kmart and Target) surged 24% to $5.7 billion andearnings grow 114% to $475 million.
“The retail businesses benefited from their well-established value credentials and omnichannel offer as customer shopping behaviours began to normalise,” according to the CEO.
“Wesfarmers Chemicals, Energy and Fertilizers’ continued strong operating performance enabled it to capitalize on favourable commodity price conditions,” he added.
Mr. Scott said solid sales and earnings were reported at Bunnings, and there were strong earnings results at Kmart.
Scott said shoppers had responded well to Kmart’s low-price positioning during the half, while changes to Target’s product focus is also paying off.
“Target’s performance reflected continued improvements in the product offer, particularly in the focus categories of apparel and soft home. With more normal trading conditions during the half, the full benefits of the significant network change program undertaken across Kmart and Target were also able to be realised.”
But sales and earnings at online store Catch were disappointing.
The earnings figure for Kmart Group does not include online marketplace Catch Group, however, which posted a $108 million loss for the half and proved one of the few dark spots on the company’s balance sheet.
Catch’s results were impacted by $33 million in restructuring costs including redundancies and asset write-offs as Wesfarmers works to reduce overhead costs and resize the business for the obvious slowdown in online shopping since the pandemic and its lockdowns ended.
The core business at Wesfarmers is hardware arm, DIY Bunnings which delivered $9.7 billion in revenue for the half, up 6.3%, with earnings rising by 1.5% to $1.3 billion. That pints to margin pressure for the giant.
“Sales growth was supported by strong growth from commercial customers and resilient consumer demand, despite prolonged wet weather on the east coast impacting spring trading,” Scott said.
In an outlook statement, Wesfarmers noted higher interest rates and inflation were expected to “impact demand in parts of the Australian economy”, but that the group’s low-cost retail models would be well-placed to face this.
The company was also confident about current trading conditions. “Results through the first five weeks of the second half of the 2023 financial year have been broadly in line with growth reported for the first half,” Wesfarmers said.
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