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

Approval of Olaroz Stage 2 Expansion FID: Orocobre Limited (ASX: ORE) with a market capitalization of $1.01 billion, is building a substantial Argentinian-based industrial chemicals and minerals company through the construction and operation of its portfolio of lithium, potash and boron projects and facilities in the Puna region of northern Argentina. The company’s flagship project is the Salar de Olaroz lithium project, which is situated in the northern Argentina. The company holds 33.5% interest in Advantage Lithium Corp., which is managing an 85,543 hectare portfolio of assets in Argentina, that comprises of the Cauchari joint venture and a 100% interest in 5 other lithium properties. Meanwhile, ORE, Toyota Tsusho Corporation (TTC), along with JV boards have now given the green signal for the Final Investment Decision (FID) relating to Stage 2 Expansion of Olaroz Lithium Facility. Post the expansion of this Stage, there is an indication to have higher capacity in terms of lithium carbonate production, by about 25 k tonnes per annum (tpa). With the expansion, the total Olaroz production capacity will increase to approximately 42,500 tpa.

Stage 2 is expected to produce technical grade (of more than 99.0% Li2CO3) lithium carbonate; and the company will use a portion of this as feedstock for Naraha Lithium Hydroxide Plant to be built in Japan. The group will undertake Stage 2 developments. At the same time, Stage 1 plant will be moved into production for 100% battery grade lithium carbonate; and once the company achieves full production rates, the product distribution after the Stage 2 is projected to be about 17.5 ktpa of battery grade lithium carbonate, 9.5 ktpa of technical grade lithium carbonate as feedstock for 10 ktpa battery grade LiOH production at Naraha Lithium Hydroxide Plant and  15.5 ktpa of technical grade lithium carbonate. The updated capital expenditure for Stage 2 has been slated to be US $ 295 million with contingency of US $ 25 million; however, this excludes crystallizer /evaporator project (to operate for Stage 1 and Stage 2). The group identified a cost of about US $ 15m for this. As of now, joint venture capital approvals will be required to be in place with other developments. Further, the Stage 2 Expansion is said to be funded by a combination of operating cashflows, project debt, and shareholders loans. About US $ 180 million for financing of the project has been indicated to be done with support from Japanese Bank. This will be done on terms similar to those followed for Stage 1 project financing. The Stage 2 project finance facility will thus be under a joint liability scheme by Japan Oil, Gas and Metals National Corporation. Seven years is the term duration of the Stage 2 facility. The finalization of the documents with draw down have been planned for 1Q of 2019. At 30 September, ORE reported to have US $ 308 million of cash available for funding purposes. This will take care of Naraha Lithium Hydroxide Plant and Olaroz Stage 2 Expansion along with other growth projects. Meanwhile, TTC and Orocobre have established some changes in joint venture agreements in view of interest of ORE’s majority joint venture. This will allow the company to consolidate earnings from the Sales de Jujuy Joint Venture (Olaroz) in its corporate financial accounts, effective FY19. TTC and ORE will be working together on strategic customer arrangements for better marketing purposes and commercialization, and TTC will be the sole and exclusive Sales Agent.


Proposed production profile (Source: Company Reports)

EPC contract for the proposed Naraha Lithium Hydroxide Plant expected to be finalized during the current quarter: ORE and Toyota Tsusho Corporation (TTC) have planned to construct a 10,000tpa lithium hydroxide plant in Naraha, Japan. This location helps in mitigating risks related to caking and degradation issues for lithium hydroxide when it gets transported and exposed to humidity. The negotiations on the EPC contract for the proposed Naraha Plant are undergoing between TTC as operator and Veolia, the preferred EPC contractor; and as per the plan, the terms of the EPC contract are expected to be agreed during the current quarter. This will allow for the further integrated and concurrent development of the projects. The arrangement is expected to boost expansion of the Olaroz lithium asset. For TTC, the economic return on this incremental investment is very attractive and the capital cost estimate for the lithium hydroxide plant is approximately US$60-70 million, which is on 100% basis, pre-subsidies. The company has secured the subsidies of US $27 million from the Japanese government. Overall, the group has earmarked second half of CY 2020 for commissioning of Stage 2 at Olaroz and Naraha Lithium Hydroxide Plant.

Cauchari Drilling Update: ORE’s exploration program at the Cauchari JV property located in Argentina, is being managed by JV partner Advantage Lithium Corp., which hold 75% of Cauchari; and ORE has a stake of 33.5% in Advantage Lithium’s issued capital and 25% in the joint venture. The group will complete the Phase III infill drilling along with resource conversion program soon; and it is currently on track to upgrade the current Inferred Resource to Measured and Indicated Resources in 2019. The drilling of holes, namely CAU22, CAU25, CAU27 and CAU19 in the SE Sector has been completed and the drilling of holes, CAU28 and CAU29 has completed to extend the NW Sector resource area further south, increasing it by approximately 20%. As per the drilling results, the presence of an extensive (of more than 300 m thick) sequence of sand and gravel have been identified in the southern continuation of the NW Sector. The company has completed the constant-rate pumping test in CAU11 to boost long-term production and the company expects the CAU07 pumping test to begin in few days. First half of 2019 has also been slated for Definitive Feasibility Study completion for Phase 3.


Year on year improvement (Source: Company Reports)

September Quarter 2018 Performance: During the September quarter 2018, 7% increase in the production for the quarter of 2,293 tonnes of lithium carbonate was noted for Olaroz Lithium Facility (in which ORE holds 66.5% stake) and this growth is over the previous corresponding period (PCP). On the other hand, there was a drop of 36% on a quarter on quarter (QoQ) basis due to the previously announced shutdown of the plant and lower evaporation rates. On the other hand, a 36% rise in the quarterly sales revenue of US$32 million was noted over pcp and the company has achieved the average realised price of US$14,699/tonne on a free on-board basis (FOB). It is anticipated that the pricing achieved in the December quarter will be below that achieved in the September quarter, however the pricing achieved for the December half year is not expected to be significantly less than the June half year. Moreover, during the September quarter, for Borax Argentina, there has been 11% decline in the overall sales volume on the June quarter to 9,407 tonnes and the sales revenue fell by a similar magnitude while the company achieved the average price per tonne in line with the June Quarter. The revenue was lower owing to sluggishness in commencement of sales to agriculture market in Brazil. The company has recovered the delayed September volumes in October. Meanwhile, the Tincalayu Expansion Project feasibility study is currently under internal review.

Cash Position at the End of September Quarter 2018: ORE had available cash of US$308.7 million after spending for the Advantage Lithium capital raise (US$4M), Cauchari JV expenditure and early expenses on the Naraha Lithium Hydroxide Plant. Including SDJ and Borax cash and project debt, the company’s net group cash is US$221.7 million at the end of September quarter. ORE did not give any working capital financing to Borax Argentina during the September quarter; while corporate operating costs and foreign exchange losses for the quarter were US$2.1 million and US$0.1 million, respectively. The company has paid a further US$6.4 million for development activities in Q1 FY19. For the quarter, the company has received interest on Term Deposits of US$1.6 million.

Stock Recommendation: Meanwhile, ORE stock has risen 8.7% in three months as on December 11, 2018 with a rebound in sentiments for lithium. The company’s stock is trading at A$4.01 and has an immediate support at $3.33 and resistance around $5 level. ORE expects the production in FY 19 to be higher than FY 18; and the company holds a strong position when it comes to merging as a low cost, high margin producer with Olaroz delivering EBITDAIX of US$94.6M in FY 18.  The latest expansion related approval solidifies the development timeline and strategy that runs around Stage 1 at 17.5 ktpa of battery grade lithium carbonate, Stage 2 at 25 ktpa industrial grade lithium carbonate and 10 ktpa lithium hydroxide conversion plant fed from Stage 2 material. Thus, upcoming production result with FID on Stage 2 and other key contracts can be catalyst for growth. A single digit stock price upside is expected in the medium to long term. Based on the foregoing, we give a “Buy” recommendation on the stock at the current price of $4.01, up 3.6% on December 12, 2018.


ORE Daily Chart (Source: Thomson Reuters)

 
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