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Are Wesfarmers (ASX:WES) shares a buy after the $1 billion lithium play?

Could the Wesfarmers Ltd (ASX: WES) share price be worth buying after revealing a $1 lithium play with the Mt Holland lithium project?

What is happening?

Wesfarmers announced the joint approval, together with Sociedad Quimica y Minera de Chile (SQM), of the final investment decision (FID) for the Mt Holland lithium project, and committed initial funding. Full funding will be committed upon receiving environmental approvals for the Kwinana refinery, which is anticipated in early FY22.

The final investment decision was delayed in January 2020. Covalent Lithium, which is the name of the joint venture lithium company owned by Wesfarmers and SQM, has completed an updated definitive feasibility study (UDFS) for the Mt Holland lithium project.

That updated study showed an increase in the concentrator and refinery production capacity from 45,000 tonnes per annum to approximately 50,000 tonnes per annum of battery grade lithium hydroxide.

The study also shows more flexibility to provide for a second phase of the project to expand production capacity at Mt Holland and the Kwinana refinery. Preliminary work to evaluate expansion options will commence in parallel with the construction of the first phase of the project.

When will the lithium project start?

The construction of the mine, concentrator and refinery are expected to start in the first half of FY22. The purchase of items that take a long time to acquire will start in late FY21.

The first production of lithium hydroxide is expected in the second half of the 2024 calendar year.

How much will this cost Wesfarmers?

The Wesfarmers share of capital expenditure for the development of the project is estimated to be approximately $950 million and will be funded from existing cash and debt facilities. This is in addition to the hefty price that Wesfarmers paid to acquire half of the Mt Holland project when it bought Kidman Resources.

Management comments

Wesfarmers Managing Director Rob Scott said: “The development of the Mt Holland lithium project presents an attractive investment for Wesfarmers shareholders. The project capitalises on our chemicals, energy and fertilisers divisions’ chemical processing expertise and Western Australia’s unique position to support growing global demand for electric vehicle battery materials which will make a crucial contribution to global efforts to reduce greenhouse gas emissions. We have been pleased with progress of discussions with key battery manufacturers, which reflect a positive outlook for battery quality sustainably sourced lithium hydroxide.”

Summary thoughts

This has been a long time coming. It has been around two years since the market first learned of the Kidman Resources acquisition and it’s going to be a while yet until the lithium starts being produced. But the price and demand of lithium is rising and seemingly going to keep going up as more and more electric vehicles, house batteries and so on are produced.

It could turn into a good source of cashflow for Wesfarmers. It will be interesting to see if the company makes any more lithium plays in the coming years. I think this shows that Wesfarmers is looking for diversified sources of growth and it’s future-proofing the business. Wesfarmers is one of the few ASX blue chips I’d be happy to commit to owning for the long term.

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At the time of publishing, the author of this article does not have a financial or commercial interest in any of the companies mentioned.

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