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Kodal Minerals Upgrades Bougouni – But Do We Trust The Price Assumption?

Trade Kodal Minerals Shares Your Capital Is At Risk
Updated 15 Jun 2022

Key points:

  • Kodal has revalued Bougouni with upgraded lithium prices
  • The key question is how high will those lithium prices stay, for how long?
  • For the Nougouni project does depend upon that output price

Kodal Minerals (LON: KOD) shares are up 5% this morning on the back of the company's revaluation of the Bougouni lithium project. Given the numbers involved we might think that this is too small a price move and that is possible. It's also true that what has really changed is the assumption about the future lithium price and there's always a certain uncertainty in such assumptions.

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Kodal has lithium at Bougouni, it's in spodumene. That's good, how to mine spodumene is well known. How to process it into a saleable concentrate is equally known there are several processors who will buy it at that stage. There's definitely the possibility of a real business here.

How much of a business depends on what we make as our assumption of the spodumene concentrate price – not the lithium one, but the concentrate as that's what Kodal would be selling if it went into production. Kodal's announcement this morning:”improved financial metrics based primarily on an improved market outlook for the sale of lithium spodumene concentrates. The current buoyant market conditions for lithium spodumene concentrate reflect current high and future demand for battery minerals and recognise a supply deficit.”

Also Read: The Best Lithium and Lithium Mining Stocks to Buy

Current and near future spodumene prices are very high by historic standards. So, upgrade the mine model incorporating those high numbers and the mine looks like a much better idea, obviously. It's even possible that those will be the right numbers as and when the mine comes into operation. But it's no sure thing that they will be which is what the risk at Kodal is.

For something that happens in minor metals. The market changes, people get more interested in one metal or another. So more people go off to look for it. More folk think of new methods as well as new mines for it. Often enough so many new people get involved that the supposed supply shortage never does quite arise. Not because demand isn't there, but because supply expands more than demand does. This happened with rare earths immediately after 2010. It happened with lithium after the investment boom in 2013/4. This doesn't mean that the same thing will happen this time, the lithium boom could indeed be larger than the likely increase in supply. But it is to point out that it is possible that this will happen again.

That's why the Kodal Minerals share price is only slightly up on the recalculation. Given the soaring current lithium price of course a prospect is worth more. But the actual value at Bougouni will be determined by the lithium price at the time of extraction – which could be different from current forecasts.

This is why there's been only that small reaction to the upgrade of the prospects for Kodal at Bougouni. Yes, when we input the higher lithium prices into the mine valuation model we get a much higher number. But we've also got to, when making such a valuation, think about the probability of those lithium values. Valuing Kodal really depends upon those probabilities – how much and for how long is the lithium price going to remain elevated?