Production In-Line; Weak Market Conditions Impact Price
We recommend Orocobre with a BUY, but are reducing our 12-month share price target to C$5.80 from C$6.60/sh, based on a 10% DCF model. Q4/19 operating results for the 66.5%-owned Olaroz Li brine mine in Argentina released overnight were as anticipated, so we’d expect positive earnings results in August. Production rose 12% QoQ to 3,455t, but was down 4% YoY. YoY production was up slightly to a record 12,605t. This is in line with lower guidance (updated in February) to match last year. FY20 production and sales guidance will be released in August with financial results. Management has implemented a strategy of managing the brine quality. This is helping recoveries and end product quality and consistency. While Olaroz has yet to achieve 17,500 tpa design capacity, ongoing expansion makes that a moot point. New ponds are being prepared (15b, 15a, 14c, with 20a, 22b, 21a and 11a under construction), and this could help with the issue of slightly lower than average evaporation rates. Management will also look at increasing equipment availability and lowering reagent consumption.
Li market conditions remain subdued. Pricing was impacted by slowing economic activity and the China-US trade dispute, and specifically by the change in Chinese EV subsidy policy, and recent interruption to energy storage system battery manufacturing. Removal of an official Chinese EV suppliers list appears to open up Chinese markets for international companies. Ongoing tightening of emission targets in China and Europe continues and should continue to bode well for future EV sales. While the lithium market has been challenging over the past year, management appears that it can roll with these punches, maintain nice gross margins and profitability. It seeks to improve costs, specifically with regard to purified battery grade production. While the market appears oversupplied in the short term, Orocobre maintains long-term demand forecasts in line with the consensus of other major lithium producers, in the range of 17% to 20% CAGR between 2018 and 2025. Production expansions for both LCE and LiOH over the next couple of years should perhaps deliver into the emerging supply gap, and help lower costs given the added economies of scale.
Q4 sales revenue down 17% QoQ and 37% YoY to US$27.8 MM. Sales were off 4% to 3,387t. Realized prices were US$8,220/t LCE FOB, down 13% QoQ and 40% YoY. Lower revenue was mainly due to market weakness, but partially due to a sales mix of 20% purified battery grade and 80% primary battery grade. Purified material sells at a premium, but it also costs about $2000/t more; it takes longer to produce, so there is a trade-off of lower margins and lower production for better quality purified battery grade Li carbonate. Management is trying hard to decrease this so that margins are similar for each.
45% gross margins. Q4 cash costs sold were up 7% QoQ to US$4,493/t, excluding a new export tax of $572/t. Gross margins were down 29% QoQ and 62% YoY to US$3,727/t. This still represents 45% gross margins, but that is down 19% QoQ from 56%, and down 37% from 72% YoY.
Considerable expansion underway. Stage 2 expansion work continues as new evaporation ponds, secondary liming plant, roads and camp take shape. The Japanese Naraha Li hydroxide plant also got the go-ahead during the quarter. Construction will commence shortly with commissioning due in H1/21. Cash was US$248 MM at 30-Jun-19; including the mine site and Borax cash and debt, net cash is US$181 MM.
ORE Price at posting:
$2.85 Sentiment: Buy Disclosure: Held
