Orocobre Limited

ORE Details

Proposed Merger with Galaxy Resources: Orocobre Limited (ASX: ORE) is engaged in the exploration of lithium and development of lithium deposits. The primary activities of the company are the production and development of industrial chemicals in Argentina. It also includes the operations of Borax. It operated under three reportable segments, Corporate, the Olaroz project and Borax. On 19 April 2021, ORE announced its proposed merger with Galaxy Resources Limited (ASX: GXY). Under the proposal, ORE will be acquiring 100% shares of GXY for a consideration of A$4bn. Post-merger, GXY will hold 45.8% of the total diluted share of the combined entity and ORE will be holding rest of the diluted share capital. The merged entity will be branded under a new name in coming weeks. The head office for the new entity will be in Buenos Aires, Argentina. After the merger, GXY shareholders will get 0.569 of ORE shares for each share of GXY held. With the merger proposal, ORE will be getting the benefit from the recent study on “Sal de Vida” lithium project by GXY. This merger will aid ORE to be in the top 5 global lithium companies.

Merging Entities (Source: Company Reports)

Key Event Dates: ORE has announced regarding the merger with GXY on 19 April 2021. For the purpose, the company will dispatch its scheme booklet to GXY shareholders in late June 2021 and meeting for the scheme will be scheduled in late July 2021. The record date for the scheme of merger will take place in early to mid-August 2021 and finally, the scheme will be implemented in mid-August 2021.

Key Event Dates (Source: Company Reports)

Change in Management Post Merger: The company has announced proposed names in the management after the merger has completed. Martin Rowley would be appointed as Non-Executive Chairman, Robert Hubbard would become Deputy Chairman and Martin Perez de Solay would remain CEO and Managing Director of the company.

1HFY21 Financial Highlights: The company has registered a decline in its revenue to US$35.88mn in 1HFY21 as compared with US$48.96mn in 1HFY20. The company has reported a net loss in 1HFY21 to US$29.14mn as compared with a loss of US$18.94mn in 1HFY20. The company has registered an increase in cash and cash equivalent position to US$262.30mn as on 31 December 2020 as compared with US$171.83mn as on 30 June 2020.

Key Risks: The company is engaged in exploration of minerals. Thus, any adverse climate may result in discontinuation of exploratory activities, leading to business and financial losses for the company. The company requires regulatory approvals to carry out its business activities. Therefore, delay in regulatory approvals may lead to financial losses for the company.

Outlook: As per the company reports, with an increase in lithium prices in 2HFY21, ORE may see a jump of more than 50% in its lithium prices at US$5500/tonne. The merger represents an exciting prospect for both the companies, as it is likely to aid the groups to significantly accelerate the enhancement of their combined growth projects, going forward. The company is well placed to deliver its projects with pro forma gross cash of US$487mn on its robust balance sheet.

Valuation Methodology: EV/Sales based Relative Valuation Method (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: In the last one month, ORE has increased by ~32.86% and by ~27.68% in the last three months. The current market capitalisation of ORE stands at ~$2.13bn as of 19 April 2021. The stock is currently trading above the average 52-weeks’ price level range of ~$1.825-~$6.600. On the technical analysis front, the stock has a support level of ~$6.383 and a resistance of ~$6.607. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of high single-digit upside (in % terms). We believe that the company can trade at a some premium as compared to its peer median, considering the company has posted an increase in its cash position, geographical diversification, enhancement of their combined growth projects and strengthening its foothold in the lithium space post-merger. For this purpose, we have taken peers Pilbara Minerals Ltd (ASX: PLS), Galaxy Resources Ltd (ASX: GXY), Mineral Resources Ltd (ASX: MIN). Considering, an increase in cash position, expectation of higher price realisation for Lithium, valuation, current trading level and the proposed merger with Galaxy Resources Limited, we recommend a “Hold” rating on the stock at the current market price of $6.55, up by 5.645% as on 19 April 2021.

ORE Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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