Company Overview– Orocobre is developing the US$229m Olaroz lithium project in Argentina with a 66.5% interest, the first greenfield lithium brine operation in 20 years. First production is due mid-2014, with full capacity of 17.5ktpa lithium carbonate expected in FY15. The Company’s Olaroz Project, located in the Puna region of Jujuy Province of northern Argentina approximately 230 kilometers northwest of the capital city of Jujuy at an altitude of 3900 meters above sea level is the Company’s flagship project. Through South American Salar, the Company holds an 85% interest in the Cauchari Project, which is located immediately south of the Olaroz Project. Salinas Grandes Patassium-Lithium project located 70 kilometers southeast of the Company's flagship Olaroz project. The Company’s subsidiaries include Sales de Jujuy Pte Ltd, South American Salar Minerals Pty Ltd, Borax Argentina Holding No 1 Pty Ltd, Borax Argentina Holding No 2 Pty Ltd and Borax Argentina S.A.

Analysis– The Olaroz project remains on time and budget, with US$147m spent at the end of November 2013(US$229m capex budget with first lithium carbonate (LCE) expected late 2Q2014). ORE owns 66.5% of Olaroz through a project company Sales de Jujuy S.A. Toyota Tsusho Corporation owns (TTC) owns 25% and the local government holds 8.5%. A US$192m debt facility sourced from TTC is in place to fund olaroz construction.


Current Lithium Demand By Market (Source - Company Reports)

Lithium is an industrial metal that has a base load in electronics, ceramics and glass. Its use in battery alloys in hybrid and electric vehicle (HEV) technology will be a key growth market over the next 5-10 years. ORE’s assets are all based in Argentina, where severe inflation and devaluation of the peso has affected the economy in recent years. Current limitations on access to USD have no impact on ORE’s operations. Strong lithium grades and the lower cost lithium brine extraction process (as opposed to the alternative industry method of hardrock mining) should result in Olaroz sitting comfortable in the first quartile of global lithium cost curve. Olaroz remains on time and budget with US$147m spent by Mid-November 2013. The project capex budget is US$229m which includes a US$22m contingency. We conservatively assume a 10% overrun for a total spend of US$252m.


Forecast Growth Rate  For Lithium Demand (Source - Company Reports)

Orocobre purchased 100% of the Borax Argentina assets from Rio Tinto PLC in August 2012 for US$8.5m (US$5.5m paid upfront and a further $1m per year for the next three years).  Borax Argentina is a small but independent player in the borax market, producing 35,000tpa of boron based products and mineral concentrates. The business has three operating mines, three concentration plants and a central refinery at Campo Quijano. ORE has announced that it will commence a prefeasibility study on constructing a boric acid plant about 75km south of Olaroz project and 40km south of Borax Argentina’s Porvenir operations for an estimated US$13-17m. Increasing recoveries, reducing transport costs and a product shift towards boric acid over other borates products remains the key to improving cash flows.


Olaroz Area Map (Source - Company Reports)

Lithium consumption is currently biased towards batteries (27%), glass (20%) and ceramics (15%). The key growth market is batteries where the use in Hybrid and electric vehicle (HEV) technology should be strong over the next 5-10 years. Because lithium has the highest electrochemical difference of any metal, driving further improvements in rechargeable battery technologies will inevitable utilize lithium in one form or the other. Boron and its derivatives are used widely across a range of applications. An estimated 75% of global demand is driven by the glass (43%), Ceramics (19%) and agricultural (10%) sectors. It is also used for detergents, soaps and wood treatments with Asia the largest demand region. The growth outlook for global boron consumption looks positive with 1-population growth and urbanization, 2 – rising agricultural and nutrient consumption and 3- increasing demand for insulation, high tech glass and coatings products the key drivers to demand growth.


Olaroz Project Construction Progress (Source - Company Reports)


Orocobre’s main asset, the Salar de Olaroz (“Olaroz”) is located on a salar (salt lake) in the elevated and arid Puna region in north-west Argentina. The project includes over 700 square kilometres of mining tenements around Salar de Olaroz, including the underground aquifers that host lithium, potassium and boron rich brines. The project site is situated near a main highway that connects northern Argentina to the major port of Antofagasta, Chile, providing an accessible route to transport lithium to key ports and markets. The presence of elevated lithium was first discovered in the Puna region of Argentina in 1970, following the brine sampling studies by the Argentinean government to identify salt and borates deposits. Salars were sampled for a variety of elements, with the Olaroz and Cauchari salars (both of which ORE now owns tenements on) amongst the highest for lithium and potassium.


Olaroz Project Construction Progress (Source - Company Reports)

ORE received final approval from the Argentinean government in July 2012 to commence construction of the project. The company also entered into an agreement with  JEMSE the mining investment company owned by the provincial government of San Salvador de Jujuy, Argentina. JEMSE retains an 8.5% equity interest in the project. Orocobre and Toyota Tsusho Corporation (TTC) entered into a joint venture agreement to fund and develop the Olaroz project in 2012. TTC’s effective interest in the Olaroz project is 25%. Since its establishment in 1948, TTC has been developing a global sales network as the only trading company of the Toyota Motor Group. TTC has 224 subsidiaries and other affiliates known as the Toyata Tsusho Group, around the world and is involved in a wide range of businesses from trading, manufacturing and processing to retail and services.


Olaroz Project Construction Progress (Source - Company Reports)

The project company, Sales de Jujuy S.A, held US$82.8m equity upon creation and now has in place a US$191.9m maximum facility to fund the construction of the Olaroz project.  The project company has enough equity and debt in place to meet this conservative estimate and still have US$22m available for working capital. If further funding is required the parent entities can contribute equity into the project company.


ORE Daily Chart (Source - Thomson Reuters)


As a part of the buy-in agreement, TTC will also be responsible for marketing the lithium carbonate produced at Olaroz. ORE is aiming to sign contracts with customers in both industrial and battery grade lithium markets. This strategy ensures at least some lithium carbonate sales can occur within 3 months of first production, whilst customers seeking battery grade product can take longer but will pay a price premium.

Olaroz is a large scale infrastructure project which has been expertly executed to date. Construction at Olaroz continues to be on schedule with first battery grade lithium carbonate production anticipated for the end of June. Borax Argentina business is operating cash flow positive  and the  proposed expansion of the Boric Acid business appears to be the right strategy as it has the best combination of volume and margin. We will be putting a BUY on the stock at the current price of $2.21.

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