How lithium could unlock billions for Wesfarmers shares

Lithium could charge up the returns for Wesfarmers.

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Key points

  • Wesfarmers is planning to build its exposure to lithium in WA
  • Mt Holland is likely to become one of the largest lithium operations in the world
  • It could add $1 billion of earnings for Wesfarmers each year

Wesfarmers Ltd (ASX: WES) shares may get an impressive earnings boost from lithium in the coming years. Hence, I'm going to outline some of the most interesting features of the growth plans for the business below.

A few years ago, Wesfarmers acquired the ASX-listed Kidman Resources for $776 million, which had a 50% interest in the Mt Holland lithium project based in Western Australia. The project could have one of the world's most significant lithium deposits.

The joint venture that Wesfarmers is involved with is called Covalent Lithium.

What's so attractive about lithium?

Wesfarmers could have decided to invest in any resource, such as copper or nickel.

But, what attracted the ASX share was that there's a "strong demand outlook" for battery grade lithium. This is being driven by "increasing penetration of battery electric vehicles (BEV) and battery energy storage systems (BESS)."

Wesfarmers' research suggests that the forecast BEV and BESS demand growth of 18% per annum between 2022 to 2030 is thanks to a significant investment in BEV and lithium-based battery infrastructure.

The company noted that the lithium supply response is impacted significantly by how long it takes to get a new mining operation going.

Mt Holland

Wesfarmers believes the Mt Holland resource enables a "low-cost, long-term lithium production business." Using Wesfarmers chemicals, energy and fertilisers (WesCEF), Covalent Lithium will be an "integrated producer of premium, battery-grade lithium hydroxide for the electric vehicle market." I think it's an exciting development for Wesfarmers shares.

Located in the Western Australia Goldfield region, the goal is that it will produce around 380 kt per annum of spodumene concentrate, which will then be transported to the Kwinana refinery to be refined into 50,000 tonnes per annum of battery-grade lithium hydroxide.

In terms of progress on the project, using an update from approximately a month ago, the concentrator is more than 85% complete and early commissioning has commenced, while the refinery civil works have been completed. A majority of the long-lead items have arrived at the refinery.

First production from the Mt Holland concentrator is expected by the end of 2023, while the first production from the Kwinana refinery is expected in the first half of the 2025 calendar year.

How much earnings could lithium generate for Wesfarmers?

The fund manager TMS Capital recently suggested that Mt Holland could generate over $1 billion of earnings for the company each year.

TMS Capital suggests that a full-year contribution will occur in FY25.

Commsec numbers currently have a projection of $2.43 of earnings per share (EPS) for the 2025 financial year.

That implies a valuation of 23 times FY25's estimated earnings. That's a reasonable valuation for Wesfarmers shares in my opinion, for a diversified, growing business with increasing exposure to areas with promising tailwinds like lithium and healthcare.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Wesfarmers. 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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