We don't get an average of 70K right now, I assume, but I think average sales price and margins will go up in the next quarters, because due to contract structures producers lag behind the spot price. If the average market prices would drop to 35K USD later in the decade, as is forecasted in the Morningstar analyst report, then I would assume that Allkem could easily make that much per ton LCE on average. In any case wherever the market prices are headed I don't think we likely won't see such a big gap again between China spot price and what companies, including Allkem, got on average a few quarters ago in the future. But I can also see market prices just staying this high and not dropping much, that would be in line with Benchmark Mineral Intelligence's forecast of structural supply deficit throughout the decade. The net margins Allkem earns are dependent on many factors. In any case proudction costs per ton for new projects during the ramp up phase are not optimal and forecasted production costs will only be reached when the projects are fully rampled up. Also when Allkem builds new facilities and buys new equipment that will increase annual depreciation costs, which will reduce reported profit. Olaroz stage 1 and Mt. Cattlin are mature projects so I assume that with new projects coming online additional depcreciation costs will have a negative effect on margins. new facilities and machines --> more depreciation costs. However the higher market prices in general and low cost structure of all of Allkem's projects will result in high margins.
As Elon Musk said in the last Tesla call: "Lithium margins right now are practically software margins."
What he means by that is that is that most lithium companies are extremely profitable at today's prices, because they are far higher than production costs. These maargins are typicall found in software companies that can easily scale up their product offering to more customers, while having relatively low capital expenditures, because they don't have to produce anything in the physical sense.
Another aspect are financing costs, they are dependent on the interst rates that Allkem has to pay. I don't know how exactly their credit contracts are written, wether or not they are affected by higher interst rates. Theoretically Allkem could either use excess cash to pay don't financing debt, but they could also take advantage of a low share price and buy back shares. This wouldn't affect margins, but increase your share in the company at bargain price if you are holding Allkem stock.
btw. latest lithium prices from Fastmarkets.
AKE Price at posting:
$10.25 Sentiment: Buy Disclosure: Held
