Orocobre (ORE) | Good outcome in a tough environment
Dual headwinds: In the March quarter, ORE faced disruptions in production from COVID-19 restrictions and a weakening in the lithium carbonate market. Production from Olaroz was 2,732t of Li2CO3, which was 1,000t less than our forecast, and sales were 2,518t, which was down 23% QoQ – with the plant offline for 21 days. The sales price was US$4,810/t, down from $5,419/t in the previous quarter and $500/t less than our forecast. The good news was that, despite the lower sales, the cost of sales was US$3,972/t, down 3% QoQ (our forecast was $4,437/t). The improvement in costs is an illustration of the work being done by management and staff on reducing soda ash and CO2 consumption and costs, doing work internally rather than hiring contractors, renegotiating supply agreements and on improving the efficiency of operations.
Guidance withdrawn in uncertain times: ORE has withdrawn production and sales guidance for FY20 and is not making any commentary on lithium carbonate prices. Ten days of production has been lost due to COVID-19 labour restrictions and on top of this, the plant is being run to meet customer demand which continues to be weak. On that basis, we have reduced capacity utilisation of Stage 1 to 50-60% for CY20. The company indicated it no longer believes there will be a recovery in pricing in 2020 and that demand is unlikely to lead to any price improvement until 2021. The first quarter of 2020 was one of ongoing stockbuilding, as producers of lithium carbonate or spodumene continued to produce when consumer or end-use demand had ceased worsening the situation at the start of the year.
Earnings and valuation down: On the back of factoring in lower prices for CY20 and CY21, lower production from Stage 1 at Olaroz and a delay in the completion and ramp-up of the Stage 2 expansion, our valuation has fallen from A$2.80ps to A$2.12ps. Our NLAT forecast for FY20 has increased from US$9.9m to US$16.0m, and our FY21 forecast has been downgraded from a US$1.2m profit to an NLAT of US$6.3m.
Investment view: Our price target falls from A$2.80ps to A$2.12ps, in line with our valuation. HOLD retained. ORE will continue to languish until there is a turnaround in the lithium market. It is fortunate to have a net cash position of US$88.2m, which will assist in maintaining some construction activity at Olaroz and Naraha in the intervening period. Click here to read full report