Analyst Research
1 March 2020
Orocobre (ORE) posted solid numbers which beat more than half of analysts’ estimates at the net income and EPS line, largely driven by strong results from increasing contract lithium prices coupled with management of costs resulting in record gross cash margin and fueling a +33% increase in operating cashflow.
COMPANY DATA
| Date of Report | ASX | Price | Price Target | Analyst Recommendation |
| 29/08/18 | ORE | A$4.30 | A$6.30 | SPECULATIVE BUY |
| Date of Report 29/08/18 | ASX ORE |
| Price A$4.30 | Price Target A$6.30 |
| Analyst Recommendation SPECULATIVE BUY | |
| Sector : Materials | 52-Week Range: A$3.24 – 7.44 |
| Industry: Diversified Metals and Mining | Market Cap: A$1,121.1m |
Source: Bloomberg
INVESTMENT SUMMARY
We rate ORE as a Speculative Buy for the following reasons:
- We expect production increase across FY19 vs FY18.
- Expansion of Olaroz expected to significantly increase capacity of lithium carbonate, resulting in strong cash flow generation.
- Strong and solid fundamentals with robust lithium demand and prices to persist. We expect lithium demand growth to support pricing and be driven by:
1. Long lead times for lithium mines and hence potential short term supply constraints; and
2. Growth in new electric vehicle and hybrid vehicle sales especially in China. - Solid balance sheet.
- Potential capital management
We see the following key risks to our investment thesis:
- Commodity price volatility. There is no formal market for lithium with the pricing of lithium products determined by private negotiation between producer and end user.
- Adverse weather impacts. The company’s ’s projects are located in areas that can be subjected to severe weather events such as snow falls, which may adversely impact the company’s operations and earnings.
- Lack of exploration success. Despite ORE already successfully identifying resources and reserves, geological complexities may arise that may inhibit the future inclusion of further resources and reserves.
- Execution risk/processing issues. Any issues with the ponds system, processing or execution risks may impact the company’s earnings.
- Stability of government policy. Whilst the political climate where ORE assets are based are currently stable, we remain cognizant of any changes especially nationalization of assets and increased taxes. Moreover, we note the VAT refund received by ORE.
ANALYST’S NOTE
Orocobre (ORE) posted solid numbers which beat more than half of analysts’ estimates at the net income and EPS line, largely driven by strong results from increasing contract lithium prices coupled with management of costs resulting in record gross cash margin and fueling a +33% increase in operating cashflow.
Borax Argentina performance improved, delivering breakeven EBITDAIX (compared to a US$1.7m loss in FY17), driven by recent devaluation of Peso (bringing back in line with long term inflation) decreasing cost pressures.
On the back of ORE generating strong cashflows, the Company continues to reduce debt. Management noted that the annual production was adversely impacted by weather, but management has taken into account these challenges for the design of stage 2 at Olaroz.
We expect some price volatility going forward due to decline in Chinese spot market prices but given the small share of Chinese spot (5-10%) in ORE’s overall global market, the decline should not be a drag on earnings. We are particularly excited about ORE’s upcoming 10,000tpa Lithium Hydroxide plant in Naraha, which would provide ORE with first mover advantage in Japan. Maintain Buy.
- Olaroz Lithium facility. Performed well with total lithium carbonate production of 12,470 tonnes (up +5% on FY17), increasing the total sales revenue by +24% to US$148.9m, with 11,837 tonnes of lithium carbonate sold at an average price of US$12,578/tonne (FOB). EBITDAIX for FY18 was up +33% to US$94.6m with gross operating margins of 67% (US$8,384/tonne), making ORE as one of the lowest cost producers of lithium. Management expects production for FY19 to be higher than FY18, with FY19 price received to date of ~US$14,000/tonne.
- Borax Argentina. Sales were marginally up +1.16% to $17.4m and operating performance improved with EBITDAIX excluding asset sale at breakeven (compared to US$1.7m loss in FY17), driven by lower cost improving production performance and devaluation of Peso. To comply with IFRS, an impairment of US$8m was booked, reducing carrying value of Borax Argentina’s Plant and Equipment to nil. Management noted that trading conditions have been improving with sales in the last four months up +12% yoy and Tincalayu expansion studies (regarding production increase from 30ktpa to 100-120ktpa borax decahydrate equivalent) are under review.
- Strong cashflow = ongoing debt reduction. Strong cashflow generated by Olaroz due to higher average prices is expected to repay ~US$70m principal of project debt (reduction of ~37%) by 10 September 2018 and US$17.1m paid into DSRA (for Mizuho/JOGMEC project financing), with project debt balance reducing to US$122 in September 2018 (US$105m net of DSRA). ORE’s proportional net cash balance at the end of FY18 was US$229.1m, with net debt of US$62.5m.
- No specific FY19 guidance. Management did not provide any specific guidance numbers, however the CEO noted, “the lithium carbonate we bring to market should be produced at the very bottom of the global cost curve, placing us in a position that will always withstand short term price volatility and deliver optimal returns for shareholders.”
FY18 RESULTS SUMMARY
Figure 1: ORE P&L summary
Source: Company, BTIG
FY18 results – headline numbers. When compared to the previous corresponding period (pcp):
1. Revenue reached record half-year levels of US$148.9m (up +24%) on the back of increased sales volume of 11,837 tonnes in Olaroz.
2. Olaroz sales price jumped +28.8% to US$12,578/tonne FOB (from US$9,763).
3. Cost of sales was US$4,194/tonne, resulting in a record gross cash margin of US$8,384/tonne (up +38.5% from US$6,053/tonne).
4. EBITDAIX of US$94.6m was up +33% on pcp.
5. Underlying NPAT increased to US$25.7m.
6. Cash balance of US$316.7m with net cash of US$229m.
Lithium hydroxide plant update. ORE and TTC continue to progress on the 10,000tpa Lithium Hydroxide plant, which would further enhance ORE’s margins. The estimated capital cost for the plant is in the range of US$60-70m (pre-subsidies and financing). Management has revised the previous estimates of operating costs of US$2,500/tonne and now expect operating costs to be ~US$1,500/tonne. Management noted that subsidies of US$27m have been secured from Japanese government and ORE and TTC are targeting commissioning in 1H20.
Stage 2 expansion underway in Olaroz. ORE is fully funded to develop Stage 2 at Olaroz for total capex of US$285m (excluding VAT of US$42m), which would increase lithium carbonate production to 42,500tpa. ORE has committed US$40m from operating cash flow prior to FID (expected shortly) with pond and related infrastructure and procession plant construction approval obtained and early works commenced. Run rate operating costs for the second stage is expected to be less than stage 1 as no purification circuit would be required. Management expects construction to be completed during 2H19 and commissioning from 1H20.
Figure 2: ORE Financial Summary
Source: BTIG, Company, Bloomberg
COMPANY DESCRIPTION
Orocobre Ltd (ASX: ORE; TSX: ORL) is an ASX and TSX listed mineral resource company with a focus on lithium and borax mining operations in Argentina.
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