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 performance in the December 2018 Quarter: Orocobre Limited (ASX: ORE), listed on the ASX and Toronto stock exchange, is engaged in the resource exploration, development, and production of lithium, potash, and boron deposits in Argentina. Salar de Olaroz project is the key lithium project that is located in the Jujuy province of northern Argentina, and is ORE’s flagship development. Meanwhile, ORE stock moved up due to the strong performance by the company in the December 2018 quarter. During the December 2018 quarter, for the Olaroz Lithium Facility (in which ORE has 66.5% interest), ORE has delivered 65% increase in the  Production to 3,782 tonnes of lithium carbonate on quarter on quarter (QoQ) basis, which is the second best quarter of production the company has achieved to date. However, the production has fallen down by 4% against corresponding quarter of 2017 as the production for building up the brine depths in the last three ponds in the system was sluggish while this was established to provide feedstock to the plant. The set-up will nonetheless provide support against rains during the summer period. The company has reported 41% rise in the sales to 3,019 tonnes during the quarter. The quarterly sales revenue was of the order of US$32 million, representing a drop of 20% on the previous corresponding period (PCP). This was owing to the realised average price of US $10,587 per tonne on a free on board basis (FOB). The product pricing during the December quarter was below that of the September quarter. This was mainly because of bleak market conditions in China. Primarily, the group witnessed an impact on the shorter term contracts in China with respect to lithium hydroxide manufacturers. Further, the customers having a downstream exposure to the Chinese market but located outside China suffered a bit given the tough market conditions. For the December quarter, cash costs (on cost of goods sold basis) fell 14% to US$3,974/tonne on QoQ basis, and is marginally up on PCP basis. The aforesaid figure was without the export tax (US$882/t). On the other hand, gross cash margins (excluding export tax) was down 34% to US $6,613/tonne on QoQ basis, and was down 13% on PCP. This was again owing to lower than expected average price as received.

ORE has cash of US $284 million post considering many costs (expansion activities, activities related to Naraha Lithium Hydroxide Plant basic engineering, etc.). The group could manage the expenditure related events (corporate expenses and Cauchari JV expenditure) through interest income; however, including SDJ and Borax cash and project debt, the company reported cash of US$216.7 million. Meanwhile, for Borax Argentina, during the December 2018 quarter, there has been a 14% increase in the sales volume to 10,741 tonnes and the sales revenue rose up slightly due to the average price per tonne, which was marginally below the September quarter on the back of a change in sales/product mix.


December 2018 Quarter Performance for the Olaroz Lithium Facility (Source: Company Reports)

Received Approval of Final Investment Decision for ORE’s Growth Projects: During the December 2018 Quarter, Orocobre, Toyota Tsusho Corporation (TTC) and JV boards have given their approvals to the Final Investment Decision (FID) for expanding the Stage 2 of the Olaroz Lithium Facility. The group has indicated that the Stage 2 expansion once completed, will enable it to enhance the lithium carbonate production capacity by about 25,000 tpa, and this will help achieve total Olaroz production capacity to about 42,500 tpa. This stage 2 will also assist in having lithium carbonate with a technical grade of >99%. The key aspect to note is having a portion of the lithium carbonate being used as feedstock for the Naraha Lithium Hydroxide Plant in Japan. In this regard, negotiations on the EPC contract are underway for the proposed Naraha Lithium Hydroxide Plant between TTC (as operator) and Veolia (as preferred EPC contractor). There are several key issues that are still outstanding to be discussed, that include the revision of the capital expenditure, revision of the operation cost, schedule  of the final construction and final EPC terms. The company expects EPC contract and FID to be finalised during the current quarter and the commissioning of the plant is scheduled in 2H CY20.

Stage 2 Expansion of Olaroz, a key development catalyst: ORE is fully funded with cash and has proposed debt funding arrangements for Stage 2 expansion of Olaroz; and has started the construction of key items. These include production boreholes, ponds, roads and camp upgrades, secondary liming plant, as at Q4 FY18. Meanwhile, the revised total capital expenditure as per the company has been estimated to be US $295 million given the expansion efforts. This also includes US$25 million under contingency. The projection excludes the expenditure related to the proposed crystalliser/evaporator project given utilization in Stage 1 as well as Stage 2. The projected cost of this project is about US$15 million and this is also subject to getting normal joint venture capital approvals. With full production post the Stage 2 expansion, ORE estimates production distribution to have 17,500 tpa of battery grade lithium carbonate, and 9,500 tpa of technical grade lithium carbonate as feedstock for 10k tpa battery grade LiOH production at Naraha Lithium Hydroxide Plant. Another 15,500 tpa of technical grade lithium carbonate has been indicated to be used from the distribution. Moreover, during the December quarter, ORE has completed five new harvest ponds (17A, 17B, 18A, 18B & 16B) and two new evaporation ponds (15A & 15B); and has begun the construction of a new reactor at the existing primary liming plant. This will help in processing the higher flow rate of brine before building the Stage 2 liming plant. The mobile secondary liming plant is scheduled to be installed by late February. During the December quarter, the company has commenced the construction of major equipment for the Stage 2 primary liming plant and the company has awarded key items to a local companies. The Stage 2 liming plant is projected to be completed in Q3 FY19.


Key project milestones (Source: Company Reports)

Signed three pivotal agreements with joint venture partner Toyota Tsusho Corporation: During the December 2018 quarter, ORE has signed three significant and pivotal agreements with its joint venture partner Toyota Tsusho Corporation (TTC). The agreements include a new Olaroz Shareholders Agreement, along with a Sales and Marketing Agreement. Further, there is Orocobre Management Agreement to take care of the Olaroz JV. The Olaroz Shareholders Agreement will help merge the earnings from Olaroz in reported statutory accounts, as scheduled from January 2019. As per the latest marketing agreement, TTC will handle logistical and contractual arrangements. Under the new Orocobre Management Agreement that will focus on Olaroz JV, ORE will receive a management fee of 1.5 % of gross revenue that gets reported by the JV and this is slated from July 2019.

Appointment of Key Personnel: ORE has appointed Mr Martín Pérez de Solay as Managing Director after the retirement of Richard Seville, who also commenced his role as the Chief Executive Officer of the company on 18 January 2018. Meanwhile, Mr Seville is continuing to be the Non-Executive Director of the company. In fact, Advantage Lithium Corp (AAL) has also appointed personnel for the Cauchari JV project. These appointments include Chief Financial Officer (CFO), Project Manager, Senior Project Scheduler and Site Manager, and Environmental Services Manager, in order to achieve requisite milestones at Cauchari JV project while the project is transitioning into Feasibility Study and Execution phases.

Stock Recommendation: Meanwhile, ORE stock has risen 14.57% in one month as on January 22, 2019 on the back of strong performance in the December 2018 quarter. With the latest updates, ORE has been able to report one of the best quarters in terms of production at Olaroz. The signing of three pivotal agreements (with Toyota Tsusho Corporation) is of significance. The progress on the FID for the Stage 2 Expansion with regards to the Olaroz Lithium Facility as per approvals from TTC and JV boards are expected to boost the capacity for the lithium carbonate production by approximately 25,000 tonnes per annum.

Fundamentally, Orocobre Limited’s gross margins have shown an improvement of 10.6% in FY 2018 on the YoY basis and came in at 18.3%. However, the company’s net margins have witnessed a decline on the YoY basis. In FY 2018, the company’s net margin stood at 11% while in the previous year it was 26.9%. This reflects that company has encountered a rise in the indirect expenses especially its SGA (or Selling/General/Administrative) expenses. The company’s return on equity or ROE stood at 0.5% which demonstrates an improvement over the past five years (FY 2014-FY 2018). A parameter which could attract the attention of the market participants is that the company’s cost of revenues has witnessed a decline of 10.5% in FY 2018 on the YoY basis which implies that the company has been following a disciplined approach towards its direct costs. 

On the daily chart of Orocobre Limited, Moving Average Convergence Divergence or MACD has been applied and default values were used for the purposes. After the careful observation, it was noticed that the MACD line has crossed the signal line and is trending in the upward direction. This depicts that the stock may witness bullish momentum while other parameters fall in line. The ongoing developments are expected to serve as tailwinds for the company while lithium sector space is continuously evolving. The company’s stock is trading at A$3.34 and has an immediate support at $3 and resistance around $4 level. Based on the foregoing, we give a “Buy” recommendation on the stock at the current price of $ 3.34.


ORE Daily Chart (Source: Thomson Reuters)
 

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