About the author:

Chris Brown
Author name:
By Chris Brown
Job title:
Senior Analyst
Date posted:
26 April 2016, 10:18 AM
Sectors Covered:
Junior (Emerging) Resources

Key points

  • With production at 53% of nameplate capacity in the March 2016 quarter, the Olaroz Lithium Carbonate operation (ORE: 66.5%) achieved cashflow breakeven. Guidance is for 3,000t of LCE (70% of nameplate) in the June quarter, and nampleplate of 4.375t of LCE for the September quarter.
  • The LCE price has risen from US$5500/t in 2014 to US$7500/t with expectations that strong demand will maintain this current stronger pricing as battery storage demand continues to rise.
  • Applying a reduced discount rate as Olaroz moves through the ramp-up to full production, and factoring in stronger LCE pricing, our share price valuation has increased significantly.

March quarterly production

The Olaroz lithium carbonate project (ORE: 66.5%) produced 2,332t of Lithium Carbonate (LCE) for the quarter and reported that cash breakeven was achieved. ORE anticipates production of 3,000t in the June quarter, on the way to nameplate of 4,375t per quarter. Separately, Lithium Americas Corp and Chilean LCE producer SQM have announced a Joint Venture to develop their leases at Cauchari. Borax Argentina has returned to EBITDA profitability after a period of weakness for its products in the Brazilian agricultural markets, as well as relocation and upgrade of its production facilities.

Price and expansion potential provides upside potential

We had previously modelled a US$6,000/t LCE price. ORE now projects US$7,500/t for the short term, and market commentary suggests this could be a medium to longer term price. We have now factored this into our valuation. 

Orocobre has also announced that studies for the Stage 2 expansion - doubling capacity for US$140m capex - will commence in the second quarter of 2016. Drilling is also planned for the Cauchari project with an inferred resource of 470kt of LCE, which could provide feed for the Olaroz plant. We have not incorporated any value for a potential Lithium Hydroxide development, nor for recovery of potash from the Olaroz brine.

Investment view

Achievement of cashflow breakeven, continued successful ramp-up of production with product meeting specification, and the more 'market friendly' policies of the current Argentine government have enabled us to reduce our discount rate to 9.8%. Continued weakness of the Argentine peso has resulted in us reducing projected operating costs, and the stronger price for LCE as well as our use of higher forecast prices has increased margins.

With management having demonstrated the ability to meet product specifications, ramp up production, the capacity of the plant confirmed and now better than cashflow breakeven, market confidence in ORE is building. Subject to the changes above, our share price target increases significantly and we upgrade our recommendation to Add.

More information

Morgans clients can login to view our latest detailed report and share price target for Orocobre (ORE). Alternatively, please contact your nearest Morgans office for access.

Disclaimer(s): Analyst owns shares.

The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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