Orocobre Ltd

ORE Details

Orocobre Ltd (ASX: ORE) is a producer of lithium carbonate globally as well as an established producer of boron.

H1FY21 Results Performance (For the Period Ended 31 December 2020)

The company has posted statutory consolidated net loss of US$29.1 million from a loss of US$18.9 million in the pcp. The company’s underlying net loss after tax stood at US$27.3 million with the adjustments for the restructuring costs, impairment, foreign exchange as well as other one-off items.

Further, the group recorded a negative EBITDAIX of US$6.3 million as compared to the positive US$2.2 million, due to weak market prices. Total production of lithium carbonate reduced by 9% YoY to 6,079 tonnes owing to COVID-19 related operational restrictions and market demand.

Consolidated Income Statement (Source: Company Reports)

Quarterly Operational Update for the Period Ended 31 March 2021

With regards to Olaroz Lithium facility, the production during the March quarter increased by 18% YoY to 3,232 tonnes with 55% of production being battery-grade lithium carbonate. The product sales of lithium carbonate grew by 20% YoY to 3,032 tonnes. Total sales revenue increased by 7% QoQ and 46% YoY to US$17.7 million and the average price received rose 54% QoQ to US$5,853/tonne on the FOB basis as well as up 22% on pcp as there was stronger pricing relative to the year ago.

Key Risks

The company is exposed to operational risks due to damage or destruction of plants or assets. Adverse weather conditions would have a negative bearing on the production in terms of cost and/or quality of the product. It is also exposed to product price risk due to adverse movement in Lithium price in the market, among others.

Outlook

The company is witnessing improved market conditions. It was stated that progress has been made with the construction of the Stage 2 Expansion of the Olaroz Lithium Facility as well as Naraha Lithium Hydroxide Plant.

The company aims for the delivery of additional gas fired power generators as well as completion of pond construction and construction of the lime plant #3 in H2CY21. Additionally, it aims to complete all new wells, the soda ash facilities, and the carbonation plant in the first half of CY22.

Valuation Methodology: EV/Sales Based Relative Valuation (Illustrative)

Technical Overview:

Weekly Chart –

Source: REFINITIV

Note: Purple colour lines are Bollinger Bands® with the upper band suggesting overbought status while the lower band oversold status, and yellow lines are Fibonacci retracement lines which measure price rebound and backtrack. https://www.bollingerbands.com/

While remaining in underlying uptrend, the stock has experienced uneven growth in its prices. For the ongoing week, it has given a higher close at $6.92. Technical indicator RSI with a reading around 68, suggests that the stock has reached near the overbought zone thereby limiting the potential for the further upside.

Going forward, the stock may have resistance around the upper Bollinger band of $7.27 whereas support could be around $6.00.

Stock Recommendation

We have valued the stock using an EV/Sales multiple-based illustrative relative valuation and have arrived at a target price that reflects a fall of low double-digit (in % terms). We have assigned a slight discount to EV/Sales Multiple (NTM) (Peer Average) considering the business risks as well as negative ROE.

For the purpose of relative valuation, we have taken peers like IGO Ltd (IGO.AX), Bellevue Gold Ltd (BGL.AX), to name a few. The stock rose by ~144.52% in 9 months. It has made a 52-week low and high $2.220 and $7.280, respectively. Considering the movement in the stock price, it looks like most of the positive developments have been discounted in the current price. Thus, it would be prudent to book profits.

We give a “Sell” rating on the stock at the current market price of $6.920 per share, up by 1.615% on 3^rd June 2021.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions 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 analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

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