some views on valuation, page-2

Briefly...

99.5% battery grade LCE trades at US$6.75/kg to US$7.10/kg, and it's been stuck in that range for a year now, after a 20% increase in 2011 and 15% increase in 2012. Overall, prices in USD terms theoretically will increase by the rate of M3 expansion minus the difference between the increase in the rate of demand side and supply side expansion... so about 7% a year. Prices aren't set by a paper market traded by banks and hedge funds and ordinary blokes off the street, and is done on a contract basis, which equals price stability/certainty. In AUD terms, currently the revenue stream is $7.35 to $7.75 per kg produced.

The cost to produce a kg from Olaroz according to the DFS was ~US$1.4/kg, Richie reckons under $2/kg, I'm going by $2.5/kg based on adjustments to the cost of production from Hombre Muerto and Atacama... I'm probably overcompensating here, since Atacama isn't ideal to produce Battery grade LCE because of the level of impurities in that salar... and the FMC processing route was geared towards producing 99% technical grade LCE. (Note: There was no demand for battery grade LCE when FMC, SQM, Chemetall, Talison started their operations, and ORE is geared solely towards the battery market). I'll assume 50% of costs will likely be priced in USD and 50% in Pesos, I'll inflate the USD component by 7% as above and the Peso component by 20% and also set the Peso to USD depreciation at 20%.

The other consideration to factor is the impact Olaroz will have on the market. The current battery grade LCE demand is 50kt and is growing at a rate of 18% a year (sourced from battery producer financial reports). For instance, Toyota will be increasing Lithium battery production rate by 600% in 2014 (to coincide with Olaroz output), and this would only represent 20% of the Prius's (using Nickel batteries) they produce and sell. At a CAGR of 18%, it would take the market a mere 21 months (less than 2 years) to absorb the production from Olaroz before wanting to feed on a new project.

Y1 of action, OPERATING PROFIT on ORE's share = AUD $56.1m or 48c per share
Y2 = $61m or 52c per share
Y3 = $66.6m or 56c per share.

Disregarding the D&A accounting, admin, interest payments/received, tax (these costs will be distributed between stakeholders), expansion potential, payments from JEMSE for their 8.5% stake, Chaucari, Grandes, Borax and more importantly, in a demand market that's growing at a rate of 18% CAGR by size, you'll need more than the 7% pricing growth I've assumed to grow the supply side by an equivalent amount.

Anyway, no secret, I'm excited to see what'll unfold and will be there all the friggin way and then scream TOUCHDOWN :)