Is Competition Closing In On Orocobre?

This story features MINERAL RESOURCES LIMITED. For more info SHARE ANALYSIS: MIN

-Market deficit unlikely to last
-Question over outflows to JV
-Best exposures have strong margins
 

By Eva Brocklehurst

There has been a strong flow of news for lithium carbonate producer Orocobre ((ORE)) recently, regarding price increases for this key material used in the production of large-scale batteries. Along with the news flow emanating from ASX companies that are developing hard rock lithium assets, Deutsche Bank observes the current lithium price is quickly providing incentives for new projects.

Production at Orocobre's Olaroz lithium brine project in Argentina in the June quarter of 2,971 tonnes was slightly below the broker's forecast. Orocobre has flagged a delay of a couple of months to the ramp-up of Olaroz, now expecting 17,500 tpa in November.

Deutsche Bank retains conservative assumptions and does not assume full run rates until March quarter next year. September quarter output of 3,300-3,600t is forecast. Olaroz is the first lithium brine project to be commissioned in the last two decades.

The delay is disappointing for the broker, albeit not unexpected. Deutsche Bank's focus is on operations and cash flow, particularly as incremental news on lithium supply suggests the current deficit in the market is not going to last forever. The broker now assumes a flat US$12,000/t realised price over the next six months before the market starts to re-balance in 2017.

Orocobre equity-accounts its stake in Olaroz (66.5%) so, until the accounts are released, Deutsche Bank calculates Olaroz should have generated US$12m in operating cash flow based on June quarter production and pricing. The company has $47m in unrestricted cash in its accounts so there are no equity raising concerns, the broker suggests.

Citi is less complacent, noting the challenges that exist in building and commissioning a plant in a high altitude, remote environment. Now that nameplate at Olaroz has been pushed back the broker questions whether this can actually be achieved. Citi has concerns about the cash flow at the joint venture level, with the quarterly report suggesting the operation requires an additional $13m in the September quarter.

While acknowledging the JV details are not available until the release of the annual report, Orocobre is forecast to pay an entity (Citi assumes it's the JV) $13m in the current quarter. The broker assumes this payment is required because the operation does not have sufficient cash to fund rectification work and the US$13m debt repayment.

Hence, if the JV has only weak positive cash flow, and Orocobre is forced to make the estimated outflows, the company could be left with only $25m at the end of the September quarter. Citi retains the one Sell rating on FNArena's database for the stock.

Deutsche Bank expects ex China lithium prices will catch up with Chinese domestic prices over 2016 and it is evident such prices are rapidly bringing in new supply to the market. To this end the broker notes Enirgi Group has released its definitive feasibility study on the Rincon lithium project, Argentina.

The size of this project would make Rincon the largest brine-based lithium project in the world. First construction is likely by late 2017, Deutsche Bank assumes, with first production potentially in the market by late 2018.

Deutsche Bank believes the best quality lithium exposures have assets with strong operating margins and potential for volume growth. Hence the broker favours Albermarle and Ganfeng Lithium and has a Hold rating on Orocobre, Tianqi and Mineral Resources ((MIN)).

The FNArena database shows two Buy, one Hold and one Sell rating for Orocobre. The consensus target is $4.32, suggesting 9.4% in downside to the last share price. Targets range from $2.22 (Citi) to $5.66 (Morgans, yet to update on the quarterly).

Canaccord Genuity, not one of the brokers monitored daily on the database, had already factored in a delay in the ramp-up of Olaroz to nameplate. The broker continues to believe Orocobre is one of the best exposures to the emerging lithium ion battery theme and maintains a Buy rating.

Studies into a proposed expansion at Olaroz will now consider increased production capacity of up to 25,000 tpa while lithium hydroxide production is also being considered as a possibility. Canaccord Genuity assumes an expansion to 32,000 tpa, so incremental production beyond this could be accretive to valuation. A scoping study is due in the current quarter with full feasibility in the June quarter of 2017.
 

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