Kidman Resources Limited

Anticipation of robust lithium demand backed by Electrification of vehicles: Kidman Resources Limited (ASX: KDR) has disclosed that the Covalent Lithium, in which it had a 50% shareholding, has finished a pre-feasibility study (PFS) for the Mt Holland Lithium Project. The feasibility study has established the convincing results from the preceding studies done. These studies were directed on the Kwinana Lithium Refinery under the Mt Holland lithium Project which showed an attractive Net Present Value of US$ 2.20 Bn and a robust Internal Rate of Return of 26.60% from this project.

Moreover, the company also declared that its JV partner in the Mt Holland Lithium Project, Sociedad Quimica y Minera de Chile S.A. (SQM), has now finished its milestone payments in respect of its earn into the project. SQM has paid US$25 million straight to Kidman and has made a payment of US$60 million directly to the Covalent Lithium JV in which Kidman has a holding of 50%.

Forecasts of lithium demand correlated the application (Source: Company Reports)

Going forth, it is supposed that the Australian region has a huge ability to spearhead the lithium space. The region is one of the chief providers of lithium and spodumene. Moreover, the mounting investment will consolidate the region’s position in the worldwide lithium market. Hence its projected that the lithium demand is likely to swell by 20% per annum till the year 2025 on the back of amplified manufacture of electric vehicles. The firm is expected to exploit the favourable market dynamics and to display progress in the imminent quarters.

On the financial metrics front, the company has deleveraged its balance sheet over the year as the Debt to equity ratio has reduced from the levels of 0.52x in FY17 to 0.40x in FY18. Also, the company had no long-term debt on its balance sheet as at the end of the previous fiscal. Hence, the financial position looks decent enough.

Meanwhile, the stock price has fallen by 24.92% over the past six months as on 30 January 2019 and is thus trading at an attractive price. Hence considering the robust market outlook and the growing demand for lithium due to electrification of vehicles & the optimum debt profile, we maintain our “Buy” recommendation on the stock at the current market price of $1.125.
 

Orocobre Ltd

Strong revenue growth: Orocobre Ltd (ASX: ORE) revealed that a new Managing Director Mr. Martín Pérez de Solay had taken the control over the affairs at the company, with effect from 18 January 2019. The appointment of Mr. Solay is due to the retirement of Mr. Richard Seville.

As per the quarterly report released for the period ended 31 December 2018, the Borax Argentina project saw robust production levels attained throughout the period. Borax’s overall sales volume for the quarter rose by 14% vis-a-vis the previous quarter, to reach at 10,741 tonnes. However, its sales have shown a minor improvement owing to a reduction in the average price per tonne realized vis-à-vis the September quarter.
 
For the Olaroz facility, the company has recorded sales of US$32 Mn for the quarter, a fall of 20% from the previous corresponding period. This was on the back of a drop in the average price realization per tonne which came in at US$10,587/tonne on a FOB basis. Also, the gross cash margins came in at US$6,613/ tonne, down by 13% on pcp, on account of the lower average pricing realized.
 
The company will remain concentrated on the optimization of the product mix to expand its profitability. Moreover, the company will focus on the innovation, expansion of markets and the development of comprehensive value plans. However, the company senses that the average price realization per unit may face deterioration in the imminent quarters due to the worldwide price decline in lithium carbonate.

ORE’s Forecast of Lithium demand (Source: Company Reports)
 
The company enjoys virtual debt-free status with the current ratio of 42.57x as on 30 June 2018.
 
Meanwhile, the stock price has fallen over the past six months by 31.03% as on 30 January 2019 and is now looking attractive for accumulation in this price range. Thus, considering the top line expansion, better product mix, debt free status of the company along with the price trading at lower levels, we maintain our “Buy” rating on the stock at the current market price of $3.330 (up 4.062% on 31 January 2019).
 

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