Investors had a strong reaction yesterday to IGO's (ASX:IGO)
quarterly report, driven by concerns about the volatile outlook for lithium. IGO's shares initially plunged by 11% in early trading, but by 11:30 am, the decline had reduced to just over 4%. This reaction was expected, given warnings from other lithium players like Pilbara Minerals about increasing uncertainty in the battery metal market, especially in the current December quarter.
IGO's position was further complicated by a weak report from its expensive nickel operations in Western Australia. While IGO's sales revenue for the three months ending on September 30 increased by 3% to $248 million, underlying EBITDA dropped to $362 million. However, the true picture of IGO's performance became apparent when considering its lithium interests held through a Joint Venture centered on the highly productive Greenbushes mine in southwestern WA.
Thanks to distributions from the Joint Venture, IGO reported a 39% surge in underlying free cash flow, reaching a record $530 million. Consequently, the company's cash on hand at the end of the quarter increased by 4% to $804 million. The highlight of IGO's quarterly report was the record quarterly dividend of $578 million received from its Greenbushes lithium interest via the Joint Venture company, Tianqi Lithium Energy Australia (TLEA).
While nickel operations remained a challenge for the company, with a report on the future of the business due in December, there was some offsetting good news from its lithium business. Spodumene production saw a 5% increase to 414,000 tonnes, with record production achieved at the Greenbushes operation and improved performance at Kwinana, producing 607 tonnes of lithium hydroxide during the quarter.
However, this positive performance may not continue. IGO expressed concern in Monday's report about the volatility in the lithium sector and the potential impact on spodumene sales in the December quarter. The company stated, "Looking ahead, we note the recent volatility in the lithium market and the impact this is having on participants across the supply chain, a dynamic which is not unexpected for a market which is growing rapidly." They also indicated that Greenbushes shareholders were working on managing surplus volumes to minimise disruptions, but cautioned that spodumene sales in the December quarter were likely to be lower than production due to deferred product shipments.
This warning suggests that the Greenbushes business may face a significant drop in its dividend for the current quarter.