The shorters – taking their medicine
Orocobre (ORE), with a 66.5% interest in the Olaroz lithium brine project in Argentina, was the most heavily shorted stock listed on the ASX, with shorting representing 23% of the issued capital through August/September 2017. The short positions, largely established below A$4.00 per share, are most recently reported down to 9%.
Our interpretation is that short covering led to a spike in the ORE share price, backed by strengthening operating fundamentals. The most recent announcement by ORE confirms a strengthening price for lithium carbonate.
The outlook – no requirement for equity
Production for the December 2017 quarter is projected at a record 4,000t, moving into the higher-evaporation summer months. Production guidance of 14,000t for FY17/18 was re-stated. We hold the view that full-year guidance is appropriately conservative. Costs are expected to decline back to previous levels (US$3,500t) as volumes lift, and brine concentration improves. Commissioning of the CO2 recovery plant is projected by ORE to reduce costs in the purification circuit by up to US$500/t. We model a US$11,000/t LCE price for the December 2017 half, and US$13,750/t for the June 2018 half. The proposed Stage 2 expansion and the likely projected construction of a 10,000tpy lithium hydroxide plant in Japan are to take advantage of this projected strong market.
ORE has consistently commented that these developments will not require further equity raisings.
Updated valuation and investment view
We have lifted the projected price of LCE from US$12,000/t to US$13,750/t – a 25% premium to US$11,000/t – and extend it through the 2020/21 financial year. We model the subsequent 24 months at US$10,000/t, with the LCE price then falling to our long-term projected price of US$8,500/t.
We have lifted our valuation and share price target. Our share price target remains at a 10% premium to our valuation. The valuation is subject to the usual risks – commodity price, exchange rates, operational, geographic regulatory and fiscal. Our share price target is also subject to market sentiment both to the broader market and to this sector.
We retain our Add recommendation.
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Disclaimer(s): Analyst owns shares.
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