Wesfarmers Ltd (ASX: WES) shares have seen plenty of movement over the last 12 months — just look at the chart below. The recent FY23 result a couple of weeks ago seems to have been a catalyst for investors to send the company higher.
But can lithium be the next positive catalyst for Wesfarmers shares?
Most people may know the company as the owner of businesses such as Bunnings, Kmart, Officeworks, and Priceline.
Its chemical, energy, and fertilisers division, WesCEF, doesn't get a lot of attention but it could soon be one of the biggest earnings contributors to the business. That's if things go according to plan with the company's foray into lithium.
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Lithium plans going well
A few years ago, Wesfarmers acquired Kidman Resources, which owns half of the Mt Holland lithium project in Western Australia. The joint venture that Wesfarmers owns a part of is called Covalent Lithium.
Wesfarmers' share of total capital expenditure for the Covalent Lithium project is between $1.2 billion to $1.3 billion.
The business is looking to commission Covalent Lithium and start selling spodumene (containing lithium) in the second half of FY24. The managing director and CEO of Wesfarmers Rob Scott was upbeat on the company's lithium prospects:
[This is an] exciting and important new earnings stream for Wesfarmers and will help to offset the lower earnings expected in WesCEF as a result of the recent decline in ammonia prices and higher gas input costs.
Scott said that the company is expecting to sell 50kt tonnes of spodumene in the second half of FY24. That's based on the assumption the project's concentrator will be commissioned over the next few months and will start producing concentrate "around October, November". That will then give the operation a product to sell in the six months to June 2024.
Wesfarmers reminded investors the concentrator has a 'nameplate' capacity of 380kt tonnes per annum at a full rate, so the company's share of this is 190kt.
While they are very different businesses, with different cost structures, set-ups, and scale, we might be able to look at Pilbara Minerals Ltd (ASX: PLS) as a comparison. The ASX lithium share sold 607.5kt in FY23 and made $2.4 billion of statutory net profit after tax (NPAT), though the level of profitability is fairly dependent on lithium prices.
It's also worth mentioning that Wesfarmers is working on the Kwinana refinery which will help Covalent Lithium produce battery-quality lithium hydroxide in WA for the manufacture of lithium batteries.
How much could this help Wesfarmers shares?
Investors often judge a business based on how much profit it makes. Wesfarmers' overall profit is projected to jump in FY25 according to Commsec, with earnings per share (EPS) forecast to increase to $2.53. That compares to $2.18 of EPS generated in FY23, so overall profit could rise by 16% in two years.
At the current Wesfarmers share price, this puts the FY25 price/earnings (P/E) ratio at 21, which isn't bad at all considering the quality of the business.
