In morning trade the Kidman Resources Ltd (ASX: KDR) share price has bounced back from a heavy decline on Tuesday with a solid gain.
At the time of writing the lithium miner's shares are up 2.5% to $1.28.
Why is the Kidman Resources share price on the rise?
This morning Kidman Resources announced that it has entered a non-binding memorandum of understanding (MOU) with South Korea's LG Chem in relation to the supply of lithium hydroxide.
According to the release, the MOU contains commercial terms for the supply of 12kt of lithium hydroxide per annum to LG Chem over a term of 10 years. Pricing has been made on an arm's length basis and will be set by reference to prevailing market prices.
What now?
The two parties will now work towards turning the MOU into a binding strategic supply agreement by July 31.
If it does progress to that level it will mean the company has achieved its offtake agreement targets.
Management has previously stated its ambition to secure offtake agreements with high quality counterparties for approximately 75% of its share (22.6kt per annum) of lithium hydroxide production for the initial years of the Mt Holland Lithium Project.
This deal, along with existing agreements with Tesla and Mitsui & Co, will cover the offtake volumes targeted by its strategy.
Kidman's CEO and managing director, Martin Donohue, was pleased with the announcement and the positive impact it should have on the provision of debt facilities.
He said: "LG Chem is the world's number one automotive battery supplier and will continue to be a major supplier to the rapidly growing electric vehicle segment. We are pleased to be announcing this MOU and look forward to further developing our relationship with them. Having such a high-quality offtake counterparty provides further support for our ongoing discussions in relation to the provision of debt facilities with prospective lenders."
Should you invest?
I'm not a big fan of MOUs and believe investors ought to wait for a binding agreement before acting on them.
But having said that, I still feel Kidman Resources has a lot of potential if lithium prices remain favourable in the future.
However, it is worth remembering that there are concerns that lithium prices could crumble from an oversupply of the battery making ingredient. If this were to happen it would almost certainly weigh heavily on the shares of Kidman Resources, Galaxy Resources Limited (ASX: GXY), and Orocobre Limited (ASX: ORE).
