Liontown share price falls on project cost blowout

Liontown has released an update on its Kathleen Valley Lithium Project today.

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The Liontown Resources Ltd (ASX: LTR) share price is falling on Friday morning.

At the time of writing, the lithium developer's shares are down almost 1% to $2.96.

Why is the Liontown share price falling?

Investors have been selling the company's shares this morning after it released an update on the Kathleen Valley Lithium Project.

According to the release, the company has now awarded all major construction and mining contracts and the project remains on schedule to commence first production of spodumene by mid-2024.

Management notes that with all contracts in place, it has been able to finalise its estimates of project capital costs through to first production.

The total capital costs are estimated to be $951 million, which is up 6% or $56 million from its previous estimate of $895 million. While slightly disappointing for shareholders, this increase isn't overly surprising given cost inflation in the sector.

Liontown has also updated its operating cost estimates. It now expects a 10-year average cash cost (C1) of A$651 per SC6 tonne, excluding royalties. This is up significantly on the estimate in its DFS of US$319 (A$496) per tonne. However, that estimate was made almost two years ago.

How will Liontown fund this?

Liontown advised that it is well advanced in discussions with a lender syndicate of commercial banks and government credit agencies to obtain the funding it requires to meet its final funding requirements.

Management advised that the size of the debt package is yet to be determined but will need to at least cover the $450 million required "to fund the Capital Costs, early mine development for acceleration, costs associated with building the pre first production ROM stockpiles, corporate costs and working capital requirements through to the expected generation of positive net cash flows."

In other news, the company notes that softening lithium prices is changing its DSO plans. It is now planning to ore sort the DSO and add it to its stockpile to be processed by its own plant in the future. However, Liontown may yet sell this DSO material if market conditions improve.

Management commentary

Commenting on today's update, Liontown's managing director and CEO, Tony Ottaviano, said:

With 50 percent of the work completed on site and construction work accelerating, we have clear line of sight to delivering first production from the world-class Kathleen Valley Lithium Project on schedule in mid2024.

Notwithstanding one of the toughest markets to construct and operate seen in recent years, our Capital Costs are materially in line with our previous forecast. Our Operating Costs are based on contracted market prices and have received a tremendous amount of review and benchmarking, both internally and by third parties.

Liontown also released its annual report this morning. But given it is still in the development stage and pre-revenue, there isn't much of interest to report.

All in all, not the greatest update from the company. And if there were not a $3 per share takeover offer already on the table, I suspect the Liontown share price would be under a lot more pressure today.

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