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IGO Limited

ASX :

IGO

Market Cap : $11.31 Billion

52 Week Range : $9.23 - $17.32

Share Price : $14.80

Dividend Per Share : $0.10

Dividend Yield : 0.67 %

Buy

A high quality green energy play with diversified exposure across several materials. Lithium assets are growing in stature, and we recommend a 'Buy'.

Company Analysis

IGO (ASX: IGO) is an Australian mining company that engages in discovering, developing and operating assets focused on green metals. It has 100% interests in 3 operating assets across Western Australia, producing nickel, copper and cobalt. The company also invests in lithium mines and has a 49% interest in the downstream processing refinery at Kwinana in WA to produce battery-grade lithium hydroxide. In addition, it owns and operates multiple exploration projects across Australia and Greenland, targeting clean energy metals and REEs (rare earths).

IGO is well-positioned to benefit from the accelerating green energy transition

IGO has a diverse and Australian-based portfolio of clean energy metals with a pipeline of growth that positions it well to benefit from the growing demand for green energy metals. This is evident from the company’s substantial earnings growth in the last six years, during which EV sales rates started their exponential growth. IGO’s earnings grew from $17m in FY17 to $331m in FY22, representing a compounded annual growth rate (CAGR) of 64%.

The global EV (electric vehicle) fleet is expected to increase circa 400% by 2025, with the EV market share increasing to almost 17% by that year. The rapid growth forecast for EV demand has led to a massive growth expectation in demand for green metals. By 2030, demand for Lithium, Nickel and Copper is forecast to multiply by 6x, 4x and 4x, respectively. The rapid demand growth is expected to outpace the supply growth of these metals in the long term due to slow development timeframes as well as ESG and permitting hurdles. As a result, the sustained deficits are expected to support the strong pricing of green energy metals in the long term.

The favourable pricing environment, combined with IGO’s proven ability to benefit from the strong prices, has led to consensus analysts’ earning growth estimate of almost 400% in FY23, giving IGO’s stock a forward P/E multiple of only 6.6x. The analysts expect the high earnings to last in FY24 before starting to normalize in FY25 as the green metals’ prices start to normalize by development projects joining the supply side.

2023 is set to an extremely profitable year for IGO

IGO announced commercial production from the Kwinana Lithium Hydroxide Refinery (49% owned by IGO) on 5 December 2022. This was an important milestone as it indicated the capability of the facility to operate continuously and produce battery-grade lithium hydroxide, with recent independent testing confirming that the product’s quality meets the required standards for the lithium-ion battery industry.

According to IGO, product qualification and certification with potential offtake customers are ongoing while the facility continues to ramp up production over the course of 2023 towards the current nameplate capacity of 24ktpa, expected to increase to 48ktpa in 2024. With the extremely tight market for lithium and the product’s quality already having passed independent tests, we think finding offtake customers for Kwinana Lithium Hydroxide Refinery products is more of a certainty than not. The likely commercial sales from the project in the second half of FY23 should start to make a meaningful impact on the company’s bottom line in 2023, in our view.

In addition, IGO’s 25% owned Greenbushes lithium project saw a record production and sales revenue from a higher chemical grade spodumene sales price of US$4,187 per tonne in the first quarter of FY23, which was significantly higher than the sales price of US$1,770 per tonne in the last quarter of FY22. The company’s cost FY23 cost guidance is 225 to 275 Australian dollars per tonne, indicating a massive gross profit margin on the FY23 production guidance of 1,350kt to 1,450kt. Greenbushes lithium mine is one of the world’s largest, highest grade and lowest cost hard rock lithium operations with more than 24 years of mine life, setting up IGO as a large and long-term player in the hot lithium market.

How to play IGO’s stock?

We expect 2023 to be an exciting year for IGO, with important news flow to support the company’s share price. Ramp-up production news and offtake agreements from the Kwinana Lithium Hydroxide Refinery project are expected to be announced to the market in 2023. In addition, Multiple drilling programs are in progress at the company’s various green metals projects across Australia, with results expected to flow to the market throughout the year. Based on the current sales prices at the Greenbushes lithium project, FY23 earnings are also expected to shoot the lights out.

From a technical analysis point of view, IGO’s share price is on a long-term uptrend (the blue trendline on the chart). As such, we think prices near the uptrend around $12.50 are attractive. Our target price is the all-time high level of $17.30, last seen in November 2022. We think IGO’s share price can once again return to this level in the next 6 to 12 months when its FY23 results are expected to be announced to the market, and commercial sales from Kwinana Lithium Hydroxide Refinery are likely to make a meaningful impact on the company’s bottom line.

We recommend using a confirmed break below $12.00 as a stop-loss indicator. $12.00 is the 61% Fibonacci retracement level of the latest rally in the stock’s price, potentially making it an important support level. A confirmed break below this level would indicate that the long-term uptrend is broken, and it would indicate a significant bearish sentiment on the stock that can open the way down to lower levels.

IGO, Weekly Chart in Semi-log Scale (Source: Metastock)

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