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Orocobre Set To Expand Lithium Production And Drive Shareholder Growth In 2018

Oct. 25, 2017 3:37 PM ET
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About: Orocobre Ltd. (OROCF), Includes: AVLIF, LGCEY, TYHOF


Livio Filice

Long-term horizon, Growth, momentum, Deep Value

(404 followers)
Summary

Orocobre is expected to report the final strategy regarding Olaroz Phase 2 expansion and the Japanese lithium chemical plant.
The sale of non-core assets and all-time high lithium carbonate pricing has assisted in boosting the companies balance sheet.
The 2018-19 expansion plan will be the key driver to additional share price appreciation.
Advantage Lithium's developments provide additional upside exposure to junior exploration activity in Argentina.
With so many accomplishments achieved, Orocobre continues to focus on their aggressive expansion strategy which will be the platform for shareholder growth. Shareholders are waiting for the release of the details for final expansion plans in Argentina and Japan. This will allow shareholders to understand what the mid-term opportunity for stock price appreciation is. Preliminary data based on the doubling of Olaroz production in Argentina could be a catalyst for the share price to double. Further, developments with Advantage Lithium and the Japanese lithium chemical facility would allow for additional upside over the next 6-12 months. An increase in Advantage Lithium’s stock price rise to $2/ share in 2018 would add $60 million to Orocobre’s balance sheet in the form of marketable securities. Orocobre holds a 50% interest in the Cauchari project which will be reduced to 25% once Advantage produces a Feasibility Study in 2018. This 25% could translate into $75-100 million in value to Orocobre. Moving into 2018 and beyond, there are multiple company-specific drivers for stock price growth which will be disclosed by the end of the year. Further, as one of a handfull of lithium producers, Orocobre has direct exposure to an all-time lithium carbonate price.
In the past month, shares in Orocobre (OTCPK:OROCF), a lithium mining company focused on its flagship Argentina Olaroz project, gained significant momentum as the stock rose from CAD$3/ share to CAD$5.00, representing an increase of around 65 percent. As discussed in The Lithium Rush – A Potential Under Supply Creates A Flurry Of Activities, a flurry of global automotive and political announcements helped to spur the recent trading activity in Orocobre and other lithium mining companies. Investors have been encouraged to invest in the lithium mining and exploration space as China, England, and France have committed to banning the sale of petrol vehicles by 2040, which places pressure on automakers to shift their product strategy to include a higher number of electric vehicles. In turn, automakers of all sizes have announced their intentions to build electric vehicle and battery manufacturing facilities.

The increasing number of automakers planning to introduce electric vehicles has rattled the lithium supply chain as companies position themselves to benefit from the upcoming boom. Upstream companies such as LG Chem (OTC:LGCEY) who produces battery modules and cells have announced plans to expand global manufacturing capacity, while downstream lithium producers such as Orocobre have moved to increase both lithium carbonate production and product offering. In China, lithium carbonate pricing has been reported to be in short supply which has sent pricing to an all-time high in September.
In FY 2017, Orocobre had achieved approximately 11,000T LCE output for the first full year of production, but production still needs to increase by around 50% to reach the facilities nameplate capacity. Despite temporary setbacks, Orocobre is now positioned as a global low-cost supplier of lithium carbonate capable of delivering further value to the industry and shareholders alike. In FY2017, the company had achieved profitability, received significant funding back from the joint venture, and had divested none core lithium brine exploration assets which will assist financing company's growth strategy in a non-dilutive way. In addition, Orocobre has beaten dozens of junior lithium exploration companies to production which allows the company to seize existing opportunities around lithium carbonate shortages and high material pricing. Tight supply is expected in the years ahead which will ensure the company generates a significant amount of free cash flow from the Olaroz operation.
Outlined Rapid Expansion Strategy in the Puna Plateau and Japan

The management team has outlined an aggressive path forward which will boost shareholder value and cement the company's position in the global lithium supply chain. First, the company will be expanding the Olaroz project by doubling the current lithium carbonate annual production to 35,000T LCE. Second, the company will construct a 10,000T/year lithium hydroxide plant in Japan with its current project partner, Toyota Tsusho (OTCPK:TYHOF). It is expected that the lithium hydroxide would be exported primarily for use in the manufacture of lithium batteries, strengthening the company's position within the global lithium supply chain. Third, the proposed annual product mix of lithium carbonate would be 17,500T battery grade from its existing operations, 17,500T industrial grade, of which 9,000T would be allocated to supply the upcoming hydroxide plant in Japan. Both expansion of the Olaroz project in Argentina and the hydroxide plant will construct in parallel with each other. Meaningful production is expected in the calendar year 2019.

Olaroz Phase Two will double annual lithium production to 35,000T LCE

In late 2016, the company provided shareholders with the results of scoping studies into the expansion of Olaroz facility which could see the doubling of annual production to over 34,000T LCE by 2019. Initial capital cost including a $25 million contingency was pegged at $190 million. After additional review of ways to utilize the existing facility and infrastructure, the company reported a simplified strategy to remove an expensive purification circuit from the production expansion in 2017. The improved plan will see a split in the usage of the expanded lithium production to feed the planned hydroxide plant in Japan and increase the battery grade lithium carbonate production. This improved strategy allows the company to decrease the capital requirements to $160 million including the same $25 million contingency. In addition to a lower capital structure, it significantly reduces project development and start-up implementation risks.
Since mid-2017, the company has appointed an engineering company to complete design studies for the Olaroz Phase 2 expansions while the necessary permitting and approval processes run concurrently with the engineering, design, and selection of the equipment. Updates are expected before the end of Calendar Year 2017 including a projected time schedule around the expansion of the Olaroz Phase 2 project.

Lithium Hydroxide Plant

The company has already reported that the testing to produce lithium hydroxide has been completed by two specialized engineering firms. The test work demonstrated that a very high-quality lithium hydroxide could be produced from the company's Olaroz lithium brine facility while improving conversion efficiency from carbonate to hydroxide. This key milestone ensures that the correct materials can be produced into higher value-added substances further up the supply chain. This will ensure the company receives more monetary value for its materials sold, as lithium hydroxide currently sells for a significant premium over carbonate. It will also allow the company to further cement its position within the global lithium supply chain.

The company continues to negotiate contracts for the new facility which will be built in conjunction with project partner Toyota Tsusho. Details around the final strategy and construction commencement are expected to be announced by the end of the current calendar year. As further discussed in Orocobre Strengthens Balance Sheet, the Olaroz Stage 2 expansion facility and Japanese battery chemical plant are expected to be built using existing financial measures avoiding shareholder dilution.
Divesting non-core assets to increase capital for project expansion

Orocobre has always remained focused on bringing the Olaroz lithium brine project to market but was also forward-looking as they purchased a large basket of non-core properties. Since 2015, the Argentine lithium industry has drawn a significant amount of new capital due to a necessary change in the Argentine government coupled with increasing demand for lithium. In an attempt for junior exploration companies to partake in the current wave of financing activities, many juniors have flocked to Argentina to identify. In 2017, Orocobre further reiterated its focus on the Olaroz project by divesting non-core Argentine assets. In March 2017, the company executed an agreement with LSC Lithium for the sale of exploration tenure at certain Argentine lithium properties in exchange for $7 million, with $4 million payable at closing and $3 million at later dates. Additionally, in March, the company announced the completion of the sale of certain exploration non-core Argentine properties to Advantage Lithium (OTCQX:AVLIF) in consideration for 46,325,000 million shares. Based on current market pricing for Advantage Lithium shares the value of the transaction exceeds $23 million. Orocobre remains as a joint venture partner on certain assets.
During Calendar Year 2017, the company had also successfully recaptured much of its outstanding VAT refund entitlements. In September 2017, the company announced receipt of $23 million in total VAT refund for FY2017. These transactions have assisted in building the company’s current cash position to approximately $50 million as of June 30, 2017.

Due to the company’s strong financial and cash flow position, Orocobre is now able to execute on the Phase 2 expansion at Olaroz which will see production double, coupled with a 10,000T per year lithium hydroxide plant to be built in Japan. The company also holds a sizable position in the Caurchi Lithium exploration and development project through a 50% direct ownership and 40 million shares in Advantage Lithium. This project could also provide lithium brine to Orocobre’s carbonate producing facility beyond 2020. It is expected that the company builds out the business utilizing existing financial tools and future cash-flow from Olaroz Phase 1, avoiding dilution to shareholders.
Disclosure: I am/we are long OROCF, AVLIF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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