What is an appropriate valuation multiple for a young lithium producer like Orocobre?
Using a mature company like SQM as a starting point for that discussion, I looked over a long market cycle, and SQM goes from an enterprise value to EBITDA multiple of about 7 at the trough to about 20 at the typical high. When the commodity market goes crazy it spikes very high but that is not sustainable. It looks like SQM spends most of its time around an EV/EBITDA of 10. Currently, we are around 18, so we are near a market peak in terms of a long cycle view. Of course, people expect lithium pricing to get crazy for a while, so we may have a few crazy valuation years. But it is not sustainable in the long term.
Where I am getting lost is what kind of EV/EBITDA valuation does a young lithium producer like Orocobre deserve to have? Currently, they are ramping production so the numbers may not be meaningful, but against their target nameplate production and EBITDA levels, what kind of EV/EBITDA ratio would such a producer deserve? Shouldn't the multiple be lower than SQMs, to reflect increased operational risk of being a small company?
ORE Price at posting:
$6.91 Sentiment: Buy Disclosure: Not Held
