Australia | Oct 25 2021
Orocobre is positioning for a tight lithium market, having accumulated a number of advanced projects since its merger with Galaxy Resources
-Focus for the near term is on spodumene production at Mount Cattlin
-Orocobre's contract pricing and spot pricing converging
-Lithium prices may moderate in the northern winter
By Eva Brocklehurst
A newly enlarged Orocobre ((ORE)) is positioned for a tight lithium market. The company has accumulated a number of advanced development projects such as the Naraha hydroxide plant in Japan, Olaroz stage 2 and Sal de Vida (both in Argentina), and James Bay in Canada.
The near term centres on spodumene production at Mount Cattlin (Western Australia) and a new strategy, post the amalgamation with Galaxy Resources, is due early in 2022.
Upside risks to forecasts stem from the spot pricing backdrop converging with contract pricing, which Credit Suisse asserts is occurring more rapidly than previously anticipated. Spot prices remain well above the broker's medium-term forecasts of around US$850/t and signal robust demand.
Nevertheless, Credit Suisse believes, in terms of the longer term fundamentals, there is a material gap between net asset value and the company's share price, and remains cautious about the potential for overheating in the lithium sector.
The company has also indicated lithium prices may moderate in the northern hemisphere winter, largely stemming from pressure on industrial production in Canada because of a nationwide energy crisis. A reserve upgrade update at James Bay is expected in the December quarter.
Incorporating updated realised pricing and volume guidance for Mount Cattlin means a 7% lift to Macquarie's FY22 earnings forecasts and 3% to FY23. The broker highlights the progression of key projects, with the Naraha hydroxide plant about to be commissioned.
In the September quarter Olaroz was weak, as production was below expectations amid a higher proportion of battery grade sales mix (a positive aspect yet leading to lower volumes) along with an increase in gas prices. Macquarie points out the higher costs stem from a combination of lower volumes, the impact of the pandemic, higher gas prices and labour costs.
There was also inflationary pressures and the devaluation of the Argentine peso to contend with. The Olaroz stage 2 plant is 60% complete and production should commence in the second half of 2022.
Now Mount Cattlin is under its belt, Orocobre will leverage a strong spot market. Production guidance for 2021 has been revised up to 210-220,000t from 195-210,000t.
December quarter realised pricing guidance has been upgraded to US$12,000/t from US$9000/t, still well below spot, Citi observes. Credit Suisse forecasts lithium carbonate prices to increase to US$17,000/t in 2022 amid fast rising demand in places where LFP (lithium iron phosphate) batteries are gaining traction.
The strong performance at Mount Cattlin was offset by soft sales volumes, lower prices and higher costs at Olaroz in the September quarter. Moreover, as head grades return to mine averages production guidance at Mount Cattlin implies a step down from the September quarter.
The company may have upgraded Mount Cattlin production guidance but, as this is largely because of grade, which has been running significantly ahead of guidance, it implies a large drop in the December quarter, Morgan Stanley asserts, which should also be negative for costs. December quarter pricing and shipments are lower than expected, because of inflation and congestion.
The main priority, Citi observes, is the expediting of Olaroz and Sal de Vida. Sal de Vida is also being assessed for the possibility of merging stage 2 and 3. Ord Minnett believes there is potential in this tightening of Sal de Vida, as Galaxy Resources intended, to a 2-stage project.
The broker envisages value in the growth opportunity that will benefit from the strengthening demand for electrification and associated lithium battery requirements. Nevertheless, Ord Minnett is keen to see the plans for sequencing and operation of the combined operations under Orocobre with the main value drivers including expediting James Bay.
Credit Suisse concludes, with such emphasis on development that requires significant investment there is little possibility of a dividend in the short term.
FNArena's database has three Buy ratings and two Hold. The consensus target is $10.13, suggesting 13.4% upside to the last share price. Targets range from $8.60 (Credit Suisse) to $12.00 (Macquarie).
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