Orocobre (ORE) | Low demand, low price, no margin
Positive cost performance overshadowed by COVID-19 impacts: As flagged by the company in the March quarter, production and sales of lithium carbonate were to be reduced in the June quarter to meet market demand. The impact of COVID-19 reduced production further, with Olaroz being shut down and staff access significantly restricted, leaving production at 2,511t, marginally below our forecast. Sales of 1,601t in the quarter were down 36% on the March quarter and significantly less than our forecast, driven by a dramatic reduction in customer requirements and an increase in stock levels at the consumer end, resulting in a reduction in demand (ORE believe stock levels are now at six months in China or double normal levels). Operating costs at US$3,920/t of sales were impressive given the level of disruption on the back of the cost-out measures taken by the company. Sales prices declined further than expected, down 19% QoQ to US$3,913/t, delivering a negative cash margin of US$7/t.
Earnings and outlook suppressed: The company flagged an impairment of US$28m on stockpiles, pond inventory etc., which is a positive for future earnings as stocks will be written down to realisable value – similar to current operating costs, the P&L will not suffer from sales of stockpiles at higher operating costs. We have not included the sale of lithium carbonate in excess of production in the short term, given the state of the market and the uncertainty of forecasting costs on a shutdown basis and only selling from stockpiles. Our underlying earnings have fallen further after adjusting for a reset to our lithium carbonate prices and a delay in a recovery. Our forecast FY20 NLAT has increased to US$16.8m (from US$16.0m) and FY21 has been cut significantly from an NLAT of US$6.3m to US$15.2m. Our valuation has fallen 19% to A$1.72ps on the back of lower prices.
Investment view: We believe ORE’s share price has more than preempted a recovery in the lithium carbonate price, which appears to be even further away despite the positive EV developments in Europe, reduction in spodumene production and more reliance on cuts in South American brine output. We downgrade our price target from $2.12 to $1.72 and our rating from Hold to SELL. ORE is well positioned for when the market turns, due to the improvement at Olaroz, the implementation of the Stage 2 expansion and the development of the Naraha. Click here to read full report