Orocobre (ORE)

Fat Prophets

Friday 19th September 2014

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Fat Prophets

Orocobre (ORE)

What’s new?

Orocobre has advanced the construction phase at its Olaroz lithium project in Argentina to the cusp of start-up. Orocobre recently indicated that the project was 95% complete with US$221 million of capital spent or committed. Importantly, the project is running to schedule and is within its allocated capital budget.

Orocobre holds a 66.5% interest in the Olaroz project, along with Toyota Corporation subsidiary Toyota Tsusho with 25% and the local Juruy community the remaining 8.5%.

The commissioning of key components of the plant is imminent, with further commissioning occurring through October as components are completed. Full automation of the plant is expected to occur during October.

With a total capital cost of US$229.1 million, Olaroz will when at nameplate capacity produce 17,500 tonnes of battery grade lithium per annum. Operations will have an initial life of 40 years, with a potential to go well beyond that period on further resource definition activities.

With lithium production from a brine resource, Olaroz will immediately fall into the lowest quartile section of the lithium cost curve. As Orocobre will extract lithium from what is basically a liquid, the cost advantages are considerable compared to many hard rock lithium operations. Operating costs are forecast to be around US$2,000 per tonne of lithium produced.

Lithium is used in the manufacture of ceramics and glass and is used as an additive in greases. Lithium’s capacity to store electricity in batteries for an extended period is, however, where the future growth opportunities lay. The use of long-life batteries in the auto industry is certainly a key growth market. While the prolonged life of portable electronic consumer devises is another growth avenue.

Along with its exciting Olaroz project, Orocobre has successfully relocated, within Argentina, the Borax plant recently acquired from Rio Tinto. Orocobre believed repositioning of the plant will improve the efficiency of mineral usage and lead to a lower unit cost of production.

The Borax plant has already recommenced commercial production. Nameplate capacity is 100 tonnes per day of refined borax decahydrate, with the plant now producing at full capacity.

Outlook

Investors will be focussed on the first financial results for Orocobre, post the commencement of commercial lithium production at Olaroz. The focus will be on Orocobre’s ability to deliver the low production cost outcomes.

While future costs will be scrutinised, the lithium market looks poised for expansion. Demand for lithium is forecast to grow on a CAGR of around 11.5%, on market forecasts, for some years to come and looks set to provide a positive background.

Orocobre is only establishing stage 1 of its Olaroz project, and there is onsite expansion potential and satellite brine deposits that could deliver a multiple of stages.

Price

Over the past twelve months, during which time the Olaroz project has been under construction, Orocobre’s share price has traded in a sideways channel. Recently, broader global events surrounding the environment, and a market realisation of the financial worth of the Olaroz project broke the share price out above its overhead resistance at $2.50. Given the series of higher lows, a renewed challenge on the plus $3.00 region could be expected in the weeks ahead.

Worth Buying?

Orocobre is advancing toward becoming a low cost producer of lithium carbonate with the imminent start-up of its Olaroz lithium project. The attraction in Orocobre lies in the long life of the company’s assets and their scalability in the future. Couple these two key operational factors with a third, in that Orocobre will immediately be a low cost producer; lays open the potential for the stock to deliver future high margin returns.

Disclosure: Fat Prophets, and interests associated with the company, hold shares in Orocobre.

Greg Smith is the Head of Research at Fat Prophets.

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