With lithium sector again on doldrums as market raises concerns on lithium supply outstripping demand, key ASX-listed lithium stocks have come under pressure. Particularly, a 45% drop in lithium prices is estimated to be witnessed by 2021 and this is pulling down the lithium stocks.
 

Orocobre Ltd

ORE Details

Decent Performance Under Tight Macroeconomic Environment: Orocobre Limited (ASX: ORE) is a leading global producer of lithium carbonate and the group recently recorded top-line growth of 18.7% YoY (year on year) to US$ 10.2 Mn in 1HFY18 from US$8.6 Mn in 1HFY17. The sales inclined due to the profit on higher sale of the Diablillos tenement to Lithium X Corp for US$2.2 Mn. On the other hand, Borax Argentina’s sales were down by US$0.6 Mn or 6% compared to previous year due to sustained downward pressure on market prices and lower sales volumes. Gross margin was down by US$0.4 Mn as compared to previous period. EBITDA came at US$2.9 Mn, down by 14% against previous period on the back of higher administrative expenses in Borax division and high inflation mixed with currency devaluation in Argentina. However, NPAT surged up by 10.8% YoY to US$8.2 Mn in first half of the year from US$7.4 Mn in 1HFY17.

We believe that market fundamentals for lithium remain intact in the medium term with decent demand growth, low supply and price scenario. Meanwhile, ORE increased the capacity of phase 2 to 25000 tonnes of lithium per annum from 17500 tpa to tap the market demand of lithium product.
 

Strong Cash Flow Reducing Project Debt (Source: Company Report)
 
Group’s key takeaway from 1HFY18 led the management guidance on Olaroz Lithium facility to produce approximately 14,000 tonnes of lithium carbonate for FY18 with production forecast of 35000 – 40000 tonnes for Borax Argentina site, while corporate costs would be incurred at US$6 Mn for full year.

The company has healthy balance sheet with debt reducing plan and high cash flow to ensure brighter outlook in future. Meanwhile, ORE stock has risen 12.74% in three months as on February 26, 2018 followed by a 5.2% fall on February 27, 2018. We reiterate our “Hold” recommendation on the stock at the current price of $6.59
 

ORE Daily Chart (Source: Thomson Reuters)
 

Pilbara Minerals Limited

PLS Details

Pilbara Guides for Modest Improvement: Down 2.35% on February 27, 2018, Pilbara Minerals Limited (ASX: PLS) engages in the exploration, evaluation and development of mineral resources in Australia. It is an emerging lithium and tantalum producer, majorly focused on the development of its world-class 100% owned Pilgangoora Lithium-Tantalum Project located at Pilbara region of Western Australia. During the half year of FY18, the company has inked an offtake agreement to supply 75000 tpa of chemical grade spodumene concentrate from stage 2 production to China Great Wall Motor Company for an initial 5 year-period. The post-tax NPV of $2.1bn with strong internal rate of return of 56% has been highlighted. The result will lead to the expansion of the Pilgangoora Lithium-Tantalum project and processing capacity within months of starting production of spodumene concentrate from the Stage 1, 2MTPA operation in mid-2018 and paving the way for a final investment decision (“FID”) in Q2FY18 with start of construction by Q4FY18 and commissioning from Q4 2019.
 

Estimated capex for stage 2 project and DSO operation (Source: Company Report)
 
On financial performance front, the other income recorded solid growth of 1402.6% YoY to $1,157,000 in 1HFY18 as compared to $77,000 in 1HFY17. The group consolidated net loss after tax improved to $9,973,000 in 1HFY18 from $19,199,000 in 1HFY17 on the back of reduced selling, general and administrative cost, exploration cost and share based payment expenses as compared to previous corresponding year. Further, Basic and Diluted loss per share stood at $0.64 in first half of the year from $1.62 in 1HFY17, and showed decent improvement supported by higher other income and reduction in selling general & administrative cost and operational cost. Total project capex came at $122 Mn till December 2017. Management guidance on capex would be around $284 Mn to support the stage 2 development project and minor capital for DSO operation in years to come which will help to increase the topline growth in near future.

Meanwhile, PLS share has fallen 15.84% in three months as on February 26, 2018 given the lithium sector volatility. Based on the above developments and medium-term view on lithium prices volatility, PLS has good prospects. Meanwhile, the stock is under a trading halt pending an announcement by the company.
 

PLS Daily Chart (Source: Thomson Reuters)
 

Galaxy Resources Limited (ASX: GXY)

GXY Details

Decent Quarterly Performance: Galaxy Resources Limited (ASX: GXY) had released sound financials for the quarter ended 31 December 2017. For Mt Cattlin, the group reported strong production entailing 11% rise to 52,139 dry metric tonnes (dmt) of lithium concentrate, over Q3 2017, and record sales of 58,094 dmt of lithium concentrate, marking an increase of 39% over Q3 2017. With rise in demand for lithium-ion batteries, supply from the Australian lithium miners is expected to be linked to some improvement in price in 2018. Amidst this scenario, while average production cash costs (excluding royalties and marketing fees) of US$325 (A$423) per dmt produced were mentioned, there was a 3% rise in average realized selling price before royalties and marketing fees of US$868 (A$1,125) per dmt sold. The group also highlighted an EBITDA of A$34.2 Mn for Mt Cattlin while offtake agreements have been signed with multiple customers for 5 years for 100% of total planned lithium concentrate production. GXY has already discussed pricing for FY18 with the headline pricing to be achieved higher than FY 2017 pricing. In addition to this, the plant improvement projects have been planned to be completed in the early phase of Q3FY18 and are expected to improve recoveries to 70% to 75% from the current level of 58% (which has been above the target level of 50% to 55%).
 
 

Business Strategy (Source: Company Report)
 
Meanwhile, UBS securities Australia Ltd and its related bodies have ceased to be substantial holder of GXY. On the other hand, GXY is a key lithium player that has the ability to sustain its growth momentum fuelled by increased production and business expansion strategy. Nonetheless, the recent macro headwinds dragged the stock down by 4.4% on ASX on February 27, 2018, with muted growth of 0.58% in the last five days’ trading session.Hence, we reiterate our “Hold” recommendation on the stock at the current price of $3.29
 

GXY Daily Chart (Source: Thomson Reuters)

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