Why the Kidman Resources Ltd (ASX:KDR) share price is on fire today

The Kidman Resources Ltd (ASX: KDR) share price has been amongst the best performers on the Australian share market on Thursday.

In afternoon trade the lithium miner’s shares are up 13% to $1.13.

Why are Kidman Resources shares on fire today?

This afternoon Kidman Resources announced that it has entered into a binding heads of agreement with Japanese giant Mitsui & Co. in relation to the supply of lithium hydroxide.

According to the release, the agreement is for an initial term of two years and includes two further two-year extension options.

The agreed volumes to be supplied will gradually increase and equate to less than 15% of Kidman’s share of nameplate production from the refinery of 22.6kt per annum.

Pricing will be variable and based on the price Mitsui achieves from its customers and prevailing international prices. However, there is an unspecified floor price for the duration of the initial term and any extension terms.

The obligation of Kidman to supply its product is subject to two conditions. These are the finalisation of product specifications and the lithium hydroxide produced by the Mt Holland Lithium Project being qualified for use by Mitsui customers.

In addition to this, it is worth noting that this isn’t a definitive supply agreement just yet. The two parties have agreed to enter into a definitive supply agreement by June 30 2019. But if a definitive supply agreement is not executed by that date, either party will have the option to terminate the agreement based on pre-agreed conditions.

Kidman Resources’ CEO and managing director, Martin Donohue, appeared to be pleased with the agreement.

He said: “We are pleased to be announcing this agreement with Mitsui. This follows the announcement in May 2018 of our offtake agreement with Tesla and is further evidence of the demand for the high-quality lithium hydroxide to be produced from the Mt Holland Lithium Project. Kidman continues to progress its strategy of entering into a limited number of significant offtake agreements to develop long term customer relationships and support its proposed debt financing, while leaving a minority portion of its future supply uncontracted.”

He also revealed that discussions are ongoing in relation to further offtake agreements with the aim of securing binding agreements for up 75% of its share of production.

Should you invest?

While this is clearly a big positive, there is still a cloud hovering above Kidman Resources. That cloud relates to the possible forced forfeiture of mining tenements by the WA minister for Mines and Petroleum.

Although I think it is unlikely that this will occur, it is certainly a risk that needs to be considered.

In light of this, I still believe resources shares such as Rio Tinto Limited (ASX: RIO) or BHP Billiton Limited (ASX: BHP) could be better options right now.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. 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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