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Kidman resources: my no.1 lithium play

Charlie Aitken recommended Kidman Resources at the end of last year – so how has the stock performed since then? Can it go higher?

In my last note of 2016 for the Switzer Super Report, I wrote about Kidman Resources (KDR) as my “speculative Xmas stocking filler”. KDR was 58 cents and has now advanced to 95 cents, due to a series of positive developments.

Let’s go back in time to that note from mid-December 2016….

I also wanted to finish the year with one highly speculative idea to put in your Christmas stocking.

I want to reiterate that this is a HIGHLY SPECULATIVE IDEA and NOT SUITABLE TO ALL INVESTORS.

The stock I am writing about today is Kidman Resources (KDR:ASX), a stock that has the potential to be the largest lithium producer in Australia.

The reason KDR has a market cap of just $176m is because there is, in my opinion, a spurious legal claim of ownership of its major resource, Earl Grey, by another small mining company. Without that legal claim, which only came recently, I would strongly suspect KDR’s market capitalisation would be double the current market cap.

My view is that legal claim will be resolved and upside value will be released in KDR. In reality, the discounted current value of KDR is based off this legal claim which I think will be resolved.

So why am I so bullish on KDR?

Firstly I am bullish on lithium, and I note that FOB 6% lithium prices have advanced to US$905t versus current market estimates of $700t. I believe in structural demand growth for lithium based on growth in battery demand for electronic cars etc. The tables below are from Galaxy Resources (GXY:ASX) and are a good macro summary of Electronic Vehicle (EV) growth and potential associated demand growth for lithium.

Source: Galaxy Resources

Secondly, the Earl Grey deposit is a world-class hard rock lithium deposit with the potential to be at the bottom of the lithium cost curve due to the scale of the deposit and its flay lying nature.

Source: Kidman Resources

The simple point is Earl Grey is a world-class lithium discovery. My personal view is the stock is very cheap versus its, grade, scale and potential.

Obviously this is high risk and speculative, but my experience in mining investment suggests that the underlying resource decides the success of the investment. Remember, I was the first East Coast broker to ever recommend Fortescue (FMG) about a decade ago.

If KDR successfully settles any legal action, a view I feel is likely, then it would be fair to assume KDR would be re-rated to peer group sector valuations. In that scenario, I would be expecting to see a KDR share price above $1.00, which makes KDR at 58 cents a solid risk/reward opportunity.

To put this in context, I currently have 2% of my fund in KDR as our no.1 play on potential large scale lithium exposure, yet with the investment sized in the portfolio to represent it is highly speculative and the volatile nature of mining exploration stocks.

Anyhow, that’s my idea for the Festive Season and 2017…KDR.

So what has happened since then?
  1. The legal action mentioned above saw KDR have a decisive victory and were awarded costs. That was important.
  2. Lithium prices and sector peer valuations have risen strongly, due to Chinese initiatives on electric vehicles.
  3. World lithium leader SQM ($10b market cap) has invested in KDR’S project.

These are three major de-risking events for KDR, which reduce but do not eliminate the speculative nature of the stock. My fund has further increased its investment in KDR, as these events occurred.

I’ve attached KDR’s latest presentation above, which describes the SQM JV and pathway forward from here.

I don’t want to over-complicate this today. I wanted to update you on KDR after the series of positive developments and share price rise.

My key point is, however, is that KDR specific developments, most notably the SQM JV, are more positive than we had expected. Similarly, lithium prices and peer group valuations have advanced since I wrote “I would be expecting to see a KDR share price above$1.00”.

If KDR continues to execute well and the lithium sector remains buoyant, which I see no reason to doubt, then I’d expect KDR shares to work their way up to $1.50 over the next 12-18 months.

This remains a speculative stock and that should be reflected in sizing in portfolios.

However, in my view, there remains every chance that our thesis on lithium and KDR is correct and this becomes a much larger company as it heads towards being a significant producer.