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Kidman Resources Ltd shares surge higher on Tesla deal

In morning trade the Kidman Resources Ltd (ASX: KDR) share price has been one of the best performers on the local market.

At the time of writing the lithium miner’s shares are up 8% to $2.34.

Why are Kidman Resources’ shares surging higher?

This morning Kidman Resources announced that it has entered into a binding offtake agreement with Tesla, Inc to supply lithium hydroxide.

According to the release, the agreement is for an initial term of three years on a fixed-price take-or-pay basis from the delivery of first product. Tesla also has two 3-year term options to extend the agreement.

Unfortunately, the financial side of things is strictly confidential, making it hard to judge the merit of the agreement. Though, with lithium in strong demand, I suspect that Kidman Resources will have commanded a fair price for its produce.

This agreement equates to less than 25% of Kidman’s initial nameplate production for the first three years from refinery.

In addition to this, management advised that it is in discussions with other strategic, globally significant parties also seeking refined lithium offtake. So much so, that the expressions of interest have materially exceeded its initial refinery nameplate production.

Not that management wants to sign away all its future production. The release indicates that the company is targeting a limited number of offtake agreements, while leaving a minority portion of future supply uncontracted.

This could be an indication that management is bullish on future lithium prices and doesn’t want to miss out on selling produce at higher prices down the line.

Should you invest?

I think this is a very positive development for Kidman Resources and I can’t say I’m surprised to see its shares surge higher. However, without the financial terms of the agreement being known, it is difficult to know whether to invest on the news.

I would suggest investors keep their powder dry for now and wait to see how this impacts its future results.

In the meantime, investors might want to check out fellow lithium producers Galaxy Resources Limited (ASX: GXY) or Mineral Resources Limited (ASX: MIN). Though it is worth remembering that it is a high risk industry to invest in.

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Motley Fool contributor James Mickleboro owns shares of Galaxy Resources Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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