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Allkem’s Growth Path To Glory

Australia | Apr 20 2022

This story features ALLKEM LIMITED. For more info SHARE ANALYSIS: AKE

Allkem is on track to remain one of the world's largest producer of lithium, despite global production racing to meet surging demand.

-Few surprises in Allkem's March quarter production report
-Growth plans outlined will keep Allkem at the top of the global producer pack
-Solid cash flows from surging lithium prices mean projects are fully funded

By Greg Peel

As of 2021, Australia was the world's biggest producer of lithium, ahead of Chile, China, Argentina and the US. When Russia invaded Ukraine, the price of lithium began to surge, but despite aspirations, Russia is not at all a notable producer of lithium. The surge in price, while aligned with surges in other commodities Russia and/or Ukraine do produce, is all about electric vehicles.

We can nevertheless tie the price surge back to Russia, given the wake-up call the invasion provided particularly for those countries reliant on Russian exports, and in particular oil and gas. Those countries, mostly in Europe, were already on a path to transition from fossil fuels to alternatives, adopting carbon-neutral by 2050 policies, when suddenly the need to shift away from fossil fuels became even more urgent.

Which ropes in electric vehicles, and thus lithium.

Last year, two of Australia's leading lithium producers and developers, Orocobre and Galaxy Resources, merged to form Allkem ((AKE)), thus creating the largest Australian-listed lithium company. In global production terms, Allkem is on track to rank third, targeting a market share of 10%.

But the race is on. The rapid growth of EV production implies a raid growth of lithium demand, and unlike other metals which are facing supply deficits down the track due to lack of new resources being discovered, such as copper, lithium is relatively abundant. Hence supply is also rapidly growing across the globe, forcing miners like Allkem into growth of their own in order to stay ahead of the pack.

Like all non-base metals that have had their "fad" moments in the sun in recent decades, lithium has seen its price run up hard on speculation surrounding EVs, only to crash back to earth on the realisation EV production still had a lot of growing to do. It happened to rare earths previously, and before that, uranium.

But EV production rates are now very real, and automakers across the globe have one by one been declaring they will be all-electric in the not too distant future. So this time, analysts believe a surging lithium price is also real, and there is only upside (for the time being).

Addressing Growth

On April 5, Allkem held an investor day, at which it outlined its growth plans and lithium price expectations. Last week the miner released its March quarter production & sales report.

Suffice to say production was roughly in line with broker forecasts, balancing out performances at Allkem's two major projects, Mt Cattlin in Western Australia and Olaroz in Argentina. The miner shipped more lithium in the period than was anticipated, but only because of a catch-up from a delayed December quarter shipment.

This catch-up translated to a lower cost figure than forecast, but analysts note Allkem also managed to control soaring costs due to the WA lockdown by reducing the amount of stripping at Mt Cattlin, which will be increased again now the state is finally out of lockdown.

Production slipped below the targeted battery grade to technical grade lithium balance of 50/50, but this is also expected to revert.

Technical grade lithium is used for heat-resistant glass and ceramics, among other applications.

Realised lithium prices always track behind spot prices, given forward contracts, so as spot prices continue to march higher, Allkem has higher realised prices to look forward to. High prices are providing for a flood of cash flow, which means Allkem's long list of growth plans is fully funded.

They include:

-Olaroz stage 2, which is now 77% complete, and first production is expected by the end of June;
-Commissioning of the Naraha processing plant in Japan, expected in the June quarter, with first production in the September quarter;
-Sal de Vida (Argentina) stage 1 pond construction commenced in January, and first production is expected by the June quarter next year;
-Permitting of the James Bay (Canada) project is ongoing.

Put it all together and UBS believes Allkem can grow production threefold by 2026, thus maintaining a 10% market share over the next decade. UBS is not alone.

That does not include new resources. Immediately next door to Olaroz are the Cauchari basins, with reserve estimates making Olaroz-Cauchari one of the world's largest lithium resources.

Hence the growth list expands, including:

-A faster, larger Sal de Vida project;
-A 2.5x lift in estimated resource at Olaroz/Cauchari;
-Olaroz stage 3 beyond 2025 potentially more than doubling the current capacity;
-Mt Cattlin exploration drilling to extend life beyond 2026;
-James Bay construction start by early 2023;
-Olaroz stage 1 debottlenecking and possible relocation of the purification circuit to a lower altitude site;
-Potential duplication of the Naraha refinery in Japan, or maybe in the US or Europe.

It's electrifying.

Recommendations

Since Russia invaded Ukraine, Allkem's share price has run up over 50%. Yet only one from seven brokers in the FNArena database has anything other than a Buy or equivalent rating on the stock, reiterated post last week's quarterly update.

Morgan Stanley is Equal-weight, and also has set the lowest target price at $11.30 (last trade $13.40). The consensus target of all the brokers, including Morgan Stanley, is $15.99; without Morgan Stanley the consensus target is $16.77.

Most brokers took the opportunity when reporting on Allkem's investor day to upgrade their lithium price forecasts. Before the investor day, the consensus target was $13.59.

Bell Potter, not an FNArena database broker, also has a Buy rating, and a target of $17.53.

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