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

Strong Financial Performance For 1H FY19: Orocobre Limited (ASX: ORE), which is listed on the ASX and Toronto stock exchange, is into the production, exploration and development of the resources like lithium carbonate, potash, and boron deposits in Argentina. As on March 20, 2019, ORE is having the market capitalization of ~$902.29 million. The company, for the first half of FY 19, has reported an increase in the net profit after tax to US$24.0 million compared to net profit of US$8.2 million in the first half of FY 18. The 1H FY19 NPAT includes the share of net profit of US$24.8 million of the SDJ joint venture while, in the same period of previous year, there was net profit which amounted to US$13.1 million. During the first half of FY19, the company has produced 6,075 tonnes of lithium carbonate. Sales de Jujuy (SDJ) PTE reported positive EBITDAIX which amounted to US$36.6 million for half-year ended December 2018. For Olaroz Lithium Facility, during 1H FY19, there was a revenue amounting to US$63.5 million which was achieved by selling 5,163 tonnes of lithium carbonate. The average price received amounted to US$12,295/tonne which has risen from US$11,415/tonne the company received in the prior corresponding period. For the Olaroz Lithium Facility, the gross operating margins stood at 65% and had incurred the lithium production costs at US$4,251/tonne, that excludes the royalties and corporate costs. As a result, Olaroz happens to be considered as one of the lowest cost producing facilities for lithium chemicals. The Olaroz Lithium Facility has increased the gross cash margin to US$8,044/tonne from US$7,079/tonne in prior corresponding period (pcp). Further, Borax Argentina has reported EBITDAIX of US$0.6 million, that implies the growth of profit US$1.6 million as compared to prior corresponding period.

Also, from the valuations perspective, the company seems to provide a decent buy opportunity as its P/B ratio stood at 1.2x which is slightly lower than the industry median (Basic materials) of 1.5x hinting that the stock is slightly undervalued. The company’s liquidity position might help in meeting long-term growth prospects. Moreover, the decent standing from the cash generation capabilities might also support the company moving forward.
 

Proportionally Consolidated Profit and Loss (Source: Company Reports)

Strong Result from the updated resource estimate for the Cauchari JV property: With regards to the Cauchari JV property that is situated in Jujuy Province, Argentina, the updated estimate of the resources based on the results of the Phase II and Phase III drilling programs showed that Lithium Carbonate Equivalent (LCE) JORC Resources have more than doubled from the previous estimate of resource announced in May 2018. The exploration program is managed by Advantage Lithium Corp. which is having a 75% stake of Cauchari. ORE is having 33.5% of issued capital of Advantage Lithium and also 25% direct holding in a joint venture.


Cauchari Project Lithium Resource Estimate; March 2019 (Source: Company Reports)

Lithium Carbonate Equivalent (LCE) JORC Resources had expanded and stood at 4.8 million tonnes (Mt) of Measured and Indicated Resources contained in 1.8 km³ of brine and 1.5 Mt of Inferred Resources contained in 0.6 km³ of brine. The primary areas of the resource with regards to future brine production happen to be Archibarca Fan and the SE Sector of Project. The Measured and Indicated Resources in the SE Sector, mostly contained in Clay and Halite units, amount to around 2.3 Mt of LCE at 481 mg/l lithium. The resource update, compiled by FloSolutions SpA, has reflected the expansion of the resource to a volume of approximately 1,800 million cubic metres of brine. The results of brine chemistry analysis carried out and confirmed that the Cauchari brine is similar with respect to the composition to brine in adjacent Olaroz Salar from which Orocobre Limited is successfully producing lithium carbonate with the help of conventional lithium processing technology.

Management Changes of Advantage Lithium: Orocobre Limited had earlier made an announcement that Mr. David Sidoo had taken a temporary leave of absence from the executive role as President of Advantage Lithium Corp. Mr. Callum Grant who happens to be the Director and Technical Advisor to Advantage Lithium would be assuming Mr. Sidoo’s responsibilities as the Interim CEO (or Chief Executive Officer).

Margins on Rise: Orocobre happens to be at a decent standing with respect to its key margins as its net margin has improved significantly in the half-year ended December 2018 on YoY basis which highlights its capability to convert its top line into the bottom line. Also, its operating margins have witnessed YoY improvement which reflects the importance of its cost-effective strategies. From the analysis standpoint, ORE looks impressive with Net Margin at 259.0% in 1HFY19 as compared to industry margin of 13.7%. Operating margin for 1FY19 was recorded at 259.0% as compared to 103.0% in 1HFY18. Return to the shareholders has also been good with ROE coming in at 4.7% in 1HFY19.

Talking about the liquidity levels, we believe that the company seems to possess sound liquidity position as is reflected in its current ratio which is 49.97x at the end of December 2018. However, the industry median stood at 1.90x. 

Digging deep into ORE’s Financial Position: As of 31 December 2018, ORE corporate had US$284 million of available cash. However, after including the SDJ and Borax cash and project debt, net group cash happens to be US$207.7 million. However, the Group’s net assets expanded to US$527.8 million as at 31 December 2018 compared to net assets of US$502.1 million as at 30 June 2018 including the cash balances. The main reason for the net assets’ expansion is driven by net profit gained from the share of the joint venture. The group’s exploration and evaluation expenditure for the half-year amounted to US$3.6 million while in the same period of the previous year it was US$1.6 million. In December 2018, Orocobre Limited and Toyota Tsusho Corporation have signed a shareholder agreement which allows Orocobre to consolidate earnings from Olaroz in reported statutory accounts.


1H FY19 Financial Metrics (Source: Company Reports)

The Stage 2 Expansion would be increasing total expected lithium carbonate production capacity to around 42,500 tonnes per annum. As per the assessment of Stage 2 of the Olaroz Lithium Facility, the company will be able to produce lithium carbonate at high grade that has the extraction purity of more than 99%. The company will be using the part of it as the input for the proposed 10,000 tpa Naraha Lithium Hydroxide Plant, which will be constructed in Japan. The company will be incurring the capex of US$295 million for the expansion of Stage 2 of the Olaroz project. The Stage 2 Expansion would be financed by the combination of project debt, operating cash flows and shareholders loans.
 
Future Outlook: Moving forward, with regards to Olaroz Lithium Facility, there are anticipations that full-year production for FY19 would be approximately the same as was achieved in FY18. For Borax Argentina, the company expects the production to be in the range of 35,000 - 40,000 tonnes for FY 2019 and the capital expenditure is expected to be in the range of ~US$1-2 million. Further, for FY19, the company expects the corporate costs to be in the range of ~US$7-8 million. Throughout the second quarter of FY19, the product pricing was below than that of Q1 FY19 because of the soft market environment in China having a direct impact on shorter-term contracts in China including lithium hydroxide manufacturers.

Because of the soft pricing experience in the quarter ended December 2018, Orocobre anticipates that the average lithium carbonate sales price for the quarter ended March 2019 would be around US$9,000 per tonne (FOB).

Meanwhile, from 1 January 2019, ORE will be consolidating the accounts of SDJ PTE and will stop equity accounting. Due to the consolidation of SDJ PTE, the company will undertake the preliminary purchase price allocation (“PPA”) exercise before the 30 June 2019 and will be included in the full-year financial report.

Stock Recommendation: On the daily chart of ORE, Exponential Moving Average or EMA has been applied and default values were used for the purposes. After careful observation, it was noticed that the stock price has crossed the EMA and had moved in the upward direction after the crossover reflecting bullishness. As a result, there are expectations that the company’s stock price might witness a rise moving forward. On the other hand, the company has posted a strong profit in 1HFY19 as Olaroz continues to be one of the lowest producers in the world and Borax posted the operational profit. It has a favorable capital structure as it has a decent liquidity position with virtual debt-free status, providing more headroom for further growth. Given the backdrop of aforesaid facts and expectations of a stock price upside (with forward 24 months’ Earnings per Share expectation of about $0.10 and next twelve months to 2 years’ P/E scenario at a lower level relative to current scenario) along with the changing lithium landscape, we have a “Buy” recommendation on the stock at the current market price of $3.560 (up 3.188% on 20 March 2019).
 

ORE Daily Chart (Source: Thomson Reuters)

 
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