We visited Orocobre's (ORE) lithium carbonate project (ORE 66.5%), producing from a lithium-rich brine at the Salar de Olaroz, at 4000m in North West Argentina. The operation is currently selling six products, rather than the two products initially envisaged. This has limited production, but optimises margins and revenue.
The Stage 1 project has nameplate capacity of 17,500tpy of lithium carbonate (LCE). We model production of 14,000t of LCE in FY19. The liming plant is operating at 70-75% of design, and limits production. The process plant is producing Prime grade (99.0%) for sale, and for the Purification circuit which is producing four Battery Grade (99.5%) products, and a 99.99% product.
We also anticipate minor disruption of operations by the expansion, and have reduced our expectation of production to 14,190t of LCE (ORE 66.5%).
Chief Operating Officer Alex Losada-Calderon is an Argentinian who spent 30 years in Australia, earning a PhD at Monash University, and worked in industry, including for MIM and Ausenco. The Sales de Jujuy (SDJ) operation is fully indigenised and has achieved accreditation for ISO 9001 (Management), ISO 14001 (Environment) and ISO 18001 (OH & S). SDJ is working towards ISO 26000 (Social Responsibility) accreditation.
The US$285m expansion to 42,500tpy of LCE (ORE commitment US$190m) is fully funded with ORE holding US$330m in cash for this and its equity in the US$70m Naraha lithium hydroxide plant in Japan. Given the lessons from the Stage 1 development, and operational expertise developed, we see little risk in the expansion. Evaporation pond development – the long lead time component – has commenced. Engineering at Olaroz has had previous experience in lithium hydroxide plant design, engineering and construction in Chile.
We were impressed by the high quality of the operational and technical management, and the flexibility of the operation in harsh operating conditions.
While we have lowered our production expectations for the current year to 14,190t of LCE (from 15,000t), we have greater confidence (following the site visit) in the SDJ operation and in its ability to expand to 42,500tpy of LCE. Given the experience of technical management with lithium hydroxide plants, we also have greater confidence in that development.
Our valuation and share price target have declined marginally (Morgans clients can login to view). Should the Export Tax of ARG 3 pesos/US$ be removed in 2021 as proposed, our valuation and price target would be lifted.
We retain our Add recommendation.
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Disclaimer(s): Analyst owns shares.
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