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

Delivered Second Highest Production at Olaroz Lithium Facility in June quarter: Orocobre Limited (ASX: ORE) with a market capitalization of $1.12 billion, is transforming into a substantial Argentinian-based industrial chemicals and minerals company through the construction and operation of its portfolio of lithium, potash and boron projects and facilities in the Puna region of northern Argentina. ORE during June 2018 quarter for Olaroz Lithium Facility has witnessed 28% increase in the production of lithium carbonate to 3,596 tonnes, which is the second highest production on record. ORE’s average price on a free on-board basis (FOB) has been US$13,653/tonne during the quarter. A record quarterly sales revenue of US$44.4 million was noted relative to total sales of 3,255 tonnes of lithium carbonate. There was a 13% drop in cash costs (on cost of goods sold basis) on a quarter on quarter (QoQ) basis to US$3,800 per tonne given the surprisingly enhanced production and sales volumes. The gross cash margins thus witnessed a surge of 7% to US$9,853/tonne on QoQ basis, and this indicated profitability and cash generation capability of the Olaroz operations. Additionally, for the full year 2018, ORE has produced a total of 12,470 tonnes, which is an increase of 5% year on year. The total sales revenue grew 24% to US$148.9 million in FY 2018 on the previous year.


Production Performance in June 2018 Quarter (Source: Company Reports)

Update on Lithium Growth Projects during the June quarter: Under Stage 2 expansion, ORE commenced a US$40 million early works program and started with the construction of ponds, roads and camp infrastructure. The investment is part of the total capital expenditure of US$285 million slated for Stage 2. This expansion is expected to add 25,000 tonnes per annum (tpa) of lithium carbonate. Accordingly, Olaroz total production capacity will enhance to 42,500 tpa. ORE and Toyota Tsusho Corporation (TTC) have now continued their advance plans for the proposed 10,000 tpa Naraha Lithium Hydroxide Plant to be built in Japan. The negotiations are undergoing for the Engineer, Procure and Construct (EPC) contract and will be over by the September quarter. Accordingly, ORE is making final investment decisions for Olaroz expansion along with Naraha lithium hydroxide project. Debt packages related work is progressing well for the projects and JV structural elements for the hydroxide plant now seem to be in place.

Stage 2 expansion at Olaroz: The Olaroz Lithium Facility JV is operated through Argentine subsidiary Sales de Jujuy S.A. (SDJ) and the effective equity interests include Orocobre’s interest of 66.5%, TTC’s interest of 25.0% and JEMSE (Jujuy Energia y Mineria Sociedad del Estado) interest of 8.5%. Under this, the first large scale brine-based lithium chemicals facility will be commissioned in about 20 years. Knowing that Olaroz produces high quality lithium carbonate, the Stage 2 expansion which is fully funded with cash and proposed debt funding arrangements is expected to pave a path for growth. Based on projection of strong demand growth the Joint Venture Partners have scaled the Stage 2 expansion to 25,000 tonnes per annum (total 42,500 tonnes per annum across the whole Olaroz site). The increased expansion plans include retaining the simplified design in order to remove the purification circuit from the incremental production with the proposed development of a 10,000tpa Lithium Hydroxide Plant in Naraha, Japan. Further, the joint venture has committed to a US$40 million early works program which is being funded out of operating cashflow. This capital is a part of the overall US$285 million total capital program for Stage 2. This first phase of expansion activities has included the construction of new roads, vegetation clearing, construction of new ponds, the expansion of existing site infrastructure including a new sewage treatment plant and camp accommodation. The company has completed the first of three new harvest ponds and is now filled with concentrated brine replacing pond area that is temporarily unavailable due to salt harvesting activities. Additionally, the production in the June quarter was significantly higher than the March quarter as both the lithium carbonate plant and the pond system are operating well. This result reflects improved pond management and harvesting practices despite lower than average evaporation rates through the half. Further, during the June quarter the first cycle of salt harvesting continued from the harvestable ponds (the final eight ponds in the system). The harvesting process occurs approximately every three years and involves the removal of the majority of salt (mainly halite and sylvite) which has precipitated through the evaporation process. The company has completed the construction of the salt stockpile area immediately adjacent to the existing harvest ponds and has cleared three of eight harvest ponds of harvestable salts.


Key project milestones (Source: Company Reports)

Update on Naraha Lithium Hydroxide Plant: ORE and TTC are well advanced with plans for the proposed 10,000tpa Lithium Hydroxide Plant to be built in Naraha, Japan. The proposed location is well situated near potential customers that will reduce the common risks of caking and degradation of quality when lithium hydroxide will be transported and exposed to humidity. The process will utilise primary grade lithium carbonate sourced from Olaroz and locally sourced Japanese lime. The test work showed that a very high-quality, battery grade, lithium hydroxide could be produced via customised process. The company is continuing the negotiations for the EPC contract, and these are expected to be completed in the September quarter. The capital expenditure for the lithium hydroxide plant is at approximately US$60-70 million (100% basis, pre-subsidies). The company has secured subsidies of US$27 million secured from the Japanese government. The operating costs (excluding lithium carbonate feedstock) for the lithium hydroxide plant will be at approximately US$1,500/tonne. A final investment decision regarding the project was expected mid-year while it has been subject to joint venture board approval with commissioning forecast in late 2019.

Corporate Update during June 2018 Quarter: As at 30 June 2018, ORE had available cash of US$316.6 million (net of project debt, cash is US$227.2 million). During the June quarter, ORE has received US$1.3 million from the sale of Lithium X and US$1 million in terms of the Salinas Grandes disposal to LSC Lithium. Moreover, the contract prices are growing at the rate of 5% q-o-q. The company’s debt is reducing in line with the amortization schedule. The new projects can significantly grow the company’s cashflow.

Key Personnel Changes: Richard Seville has announced his intention to step down as Managing Director and Chief Executive Officer (CEO) of ORE. As a result, the ORE Board has commenced a global search for his replacement. However, the recruitment and transition processes are expected to take approximately 12 months.

Lithium Market: During the June quarter, ex-China lithium carbonate contract prices remained strong and moved higher, closing the gap with stagnant and declining China spot prices. The spot prices in China declined during the quarter due to the subsidy policy changes having an effect on demand due to the need for cathode and battery manufacturers to adjust to the new requirements and the need for raw material producers in China to move excess inventory. Key South American suppliers are projecting strong H2 2018 pricing driven by robust demand, particularly from cathode customers amidst a shortfall of battery grade lithium carbonate and hydroxide. The market had expected improved supply conditions with expansions expected to come in line in 2018 from Australian hard rock projects and Chinese conversion plants. However, despite growing imports of Australian concentrate and direct shipping ore (DSO) through Chinese ports, the overall supply/demand balance remains tight as conversion plants reported significant technical difficulties commissioning new capacity and converting new supply. Moreover, the battery manufacturing capacity is expected to more than quadruple, growing from 115GWh in 2017 to 470GWh in 2025. Large number of smaller players have announced expansions and new entrants are expected to be drawn into the industry by growth prospects, and over 50% of the capacity is projected to be accounted for by Panasonic-Tesla, CATL and LG Chem (Benchmark Minerals, 2018). Further, as the downstream battery supply chain has expanded largely in line with company guidance, the current deficit of lithium carbonate and hydroxide is likely to persist due to slower ramp-up profiles than expected. Significant technical improvements are required to lift output and unlock persisting bottlenecks. Overall, the Company’s view is that tight market conditions will persist for the short-term with some lumpiness or variability to be expected in supply and demand as the market grows.


Cashflow Growth through New Projects (Source: Company Reports)

Stock Recommendation: Meanwhile, ORE stock has fallen 25.17% in three months as on August 07, 2018 while ORE operates as a low cost, high margin producer of lithium chemicals. The company’s projects are fully funded and will continue to grow with early works at Phase 2 Olaroz and Naraha lithium hydroxide plant. Further, the lithium chemical prices are expected to remain resilient for the medium term. Lately, director, Robert Hubbard has acquired further 5000 shares in ORE through on-market trade. Based on the foregoing, we give a “Buy” recommendation on the stock at the current price of $ 4.34.
 

ORE Daily Chart (Source: Thomson Reuters)

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