Company overview - Orocobre Limited operates primarily in Argentina in the mining industry. The Company engages in the production ramp up of its Olaroz Lithium Facility and the operation of Borax Argentina S.A. (Borax Argentina). Its segments include Corporate, the Olaroz project, South American Salars and Borax Argentina. Its primary focus is on exploration for and development of lithium, potash and salar mineral deposits. The Company's assets also include boron mines and processing facilities of Borax Argentina and a portfolio of brine exploration projects. Its Olaroz Lithium Facility is located in the Puna region of Jujuy Province in northern Argentina, over 230 kilometers northwest of the capital city of Jujuy. Borax Argentina operates over three open pit mines in Tincalayu, Sijes and Porvenir. Borax Argentina produces products, including minerals, such as ulexite, colemanite and hydroboracite; refined products, such as borax decahydrate, borax pentahydrate and borax anhydrous, and boric acid.


 ORE Details

 
Impacted by weather conditions: For June quarter 2017, ORE has reported 9% QoQ decline in production at 2,536 tons of lithium carbonate, impacted by weather conditions slowing pond evaporation rates and preventing delivery of a soda ash, a key reagent in the production process, which resulted in the cessation of operations for three days. Sales revenue for the quarter declined by 14% QoQ to US$27.4 million with average sales prices up 5% to US$10,696/ton.  The price achieved for the quarter is a result of higher pricing in short term contracts compared to last quarter. The cash cost of sales was up 20% QoQ to US$4,279/ton, due to lower production levels and higher soda ash consumption from lower brine concentrations. Costs are expected to decrease as brine concentration and production increases with accelerating evaporation rates through Spring and Summer. Gross cash margins for the quarter remained strong at US$6,417/ton with the increase in sales prices offsetting the increase in costs. Overall gross operating margins remain strong at 60%. The overall production for FY17 grew by 72% year on year (YoY) to 11,862 tons of lithium carbonate, while reporting US$120 million revenue for FY17.
 

Production and Sales summary; (Source: Company reports)

During the quarter, the design for the improved pumping system was finalized resulting in the program being increased to six pumps, remote monitoring systems and additional water cleaning lines to the pumps for a revised capital cost of US$2.7m. This program will be undertaken in two stages with the most important stage being completed by October when evaporation rates increase in conjunction with the need to increase interpond brine transfers. An indicator of improved pond management is the increase in area under evaporation which maximizes evaporation efficiency, while the pond area under evaporation has been maintained more than 90% since the initial review in February 2017. The process of re-establishing the correct inventory profile (volume and concentration) would take approximately six months and is expected to be completed in August. The six-month duration is due to the pond system having significant inertia and the process occurring during the low evaporation time of the year. Prior to the pond issue, the purification circuit has achieved a maximum throughput rate of 43 tons per day (tpd) and runs consistently at 35-40 tpd (73-83% of nameplate). Recently fitted hydrocyclones are expected to allow the purification circuit to achieve nameplate capacity of approximately 48 tons per day. The primary circuit runs consistently above nameplate capacity with a maximum achieved throughput of 66 tpd some 35% above design rate of 48 tpd.


Pond area under evaporation; (Source: Company reports)
 
Revised scope of phase 2 expansion studies for Olaroz: Olaroz is a low-cost producer with proven process route. For June quarter, Olaroz reported 19% QoQ sales revenue of US$32.1M on 3,142 tonnes with gross cash margin of US$6,646/ton, up 21% QoQ. The Phase 2 expansion investment decision remains dependent on achieving Phase 1 design production rates and the expansion being funded without further equity capital (i.e. funded by project finance and Phase 1 operating cashflow). On 15 December 2016, Orocobre announced the results of scoping studies into the expansion of Olaroz and the proposed doubling of production at a cost of US$190 million including US$25 million contingency. Subsequently, these plans have been simplified to remove the purification circuit from the incremental production. The resultant product mix is 17,500 ton per annum Battery Grade lithium carbonate (>99.5%) from the existing purification circuit and 17,500 ton per annum Industrial Grade lithium carbonate (avg. 99.0%), which will provide feedstock for the planned lithium hydroxide plant in Japan. Further, this simplified strategy results in lower capital expenditure of approximately US$160 million including a US$25 million contingency and lower implementation risk as the project is based around a simple duplication of bores, ponds and primary circuit of Phase 1 at Olaroz. The full cost of the pond system contained within the total capital expenditure estimate for Phase 2 is US$75 million.


Exploration and Production development at Olaroz; (Source: Company reports)

Sale of exploration assets to Advantage Lithium Corp:  The company has completed the sale of a suite of exploration assets to Advantage Lithium Corp (TSV: AAL) in the March 2017 quarter. AAL is well funded having raised C$20,000,000 capital in February 2017. Orocobre holds 46,325,000 (35%) of the issued shares of AAL and 2,550,000 warrants exercisable at C$1, and retains a 50% interest in the Cauchari Project and AAL has the right to increase its interest to a total of 75% by the expenditure of US$5,000,000 or production of a Feasibility Study. AAL also took a 100% interest in five other lithium properties that were previously held by Orocobre totaling 85,543 hectares. The flagship Cauchari Property has an existing inferred resource of 470,000 tonnes of Lithium Carbonate Equivalent and a large exploration target to be tested with a 17-hole drill program. Drilling commenced in May 2017 with the successful casing of Hole CAU07, the first of the five-hole Phase One program located in the North-West block of the Cauchari property. Importantly, the objective of work at Cauchari is to rapidly advance the property through exploration and towards development by 2018/2019. A diamond drill program to complement the rotary program will be conducted over the December half year. The overall objective for 2017 remains an updated resource estimate combining both NW and SE blocks of Cauchari moving into a Scoping Study in early 2018.

Adoption of electric vehicles (EV’s) encouraged by government incentives: Contract prices for lithium carbonate remain above US$10,000/t after doubling in 2016 as market growth rates have lifted from 10% p.a. to over 12% p.a. and are expected to reach over 15% by 2020. The key driver for demand growth has also shifted due to the adoption of lithium-ion battery in personal electronics such as laptops, tablets and phones which drove the first demand surge has reached the mature phase of the product life cycle (in developed economies at least). However, a more significant growth catalyst in terms of potential lithium consumption has emerged, led by world-wide adoption of electric vehicles (EV’s) encouraged by government incentives and infrastructure, falling costs of battery packs, improved performance of rechargeable batteries and a greater range of EV models to suit end-consumer needs. In 2016 EV penetration was approaching 1% worldwide. Several European countries were ahead of the adoption curve including Norway and the Netherlands having achieved EV shares of 25% and 10% respectively due to early introduction of government incentives beginning in 1996. Twenty years later countries with much higher car ownership and fleet numbers have begun to implement similar incentives and develop charging infrastructure. As of 2016, 14 countries participating in EV incentive programs had announced targets that would require 12.7 million new EVs between 2016 and 2020 and approximately 493,000 tons of lithium carbonate equivalent (LCE).
 

Lithium demand to meet EV targeted Electric Vehicles; (Source: Company reports)
 
Rechargeable battery manufacturing industry to drive robust demand: The rechargeable battery manufacturing industry has signaled a confidence in the industry with worldwide manufacturing capacity set to quadruple from ~75 GWh currently to over 305 GWh by 2020 (Benchmark Minerals). The vast majority of large scale car manufacturers currently have, or will soon release, an EV model encouraged by growing consumer demand, government manufacturer incentives and decreasing li-ion battery pack costs, which have fallen from US$600/kwh in 2012 to ~US$150/kwh currently. Installed battery manufacturing capacity was estimated to be operating above 90% utilization in 2016, therefore additional battery capacity is required to ensure continued EV growth at or above the current rate of 40% p.a. Given growth is not expected to slow in the foreseeable future, vertical integration is likely to continue with significant potential for greater involvement and investment in lithium projects from downstream participants including battery and EV manufacturers.


Lithium Supply and Demand LCE tpa. (Source: Company reports)
 
Stock performance: The stock has declined over 21% in last twelve months (as at August 02, 2017), while it is up 4.8% in the past three months. Given the ongoing project developments and overall growth prospects on the back of rising demand for lithium, we give a “Buy” recommendation on the stock at the current market price of $3.23
 

ORE Daily chart; (Source: Thomson Reuters)
 

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