Orocobre Limited (ASX:ORE) is responding to challenging lithium chemical market conditions, which remained muted so far, and the market and corporate strategy of the lithium processor and explorer resembles the strategy of industry peer- Galaxy Limited (ASX:GXY), which aims at lowering operating costs and develop quality assets by the time industry anticipated demand for lithium picks up during the second half of the year.
ASX lithium stocks are witnessing some respite post a deep correction due to the lithium supply glut, which was nothing but the own doing of the global and Australian lithium mining companies; however, in the status quo, the lithium mining companies have limited the production and keeping it under check in tandem with the offtake demand from China, where most of Australia’s lithium consumers are located.
While the demand for lithium-based chemicals or battery-grade lithium carbonate and lithium hydroxide is expected to increase as EV industry is embedding deep roots, China is currently witnessing an epidemic threat of the coronavirus, which is estimated to has caused over 200 deaths and ~10,000 reported infection cases, which could be another short-term challenge for the lithium industry along with the supply glut.
The higher embedding roots of EV across the global front is now also pushing up the demand for other battery metals in the market. Battery metals like cobalt, copper, nickel, are already under a rally, though short-term downside could be seen at present amid certain factors.
Despite various development across the EV front such as the development of better efficient models by carmakers, stable subsidy in China; the lithium market is still under pressure for some time.
While challenges are evident, it is worth looking at companies, which are managing their corporate affairs well and sailing the turbulent lithium market, which has responded time to time like any other commodity in the wake of geopolitical events and fundamental shifts such as trade-tussle between China and U.S., the impact of oversupply, and many other such factors might present headwinds for the lithium industry.
Galaxy is one such example, which is managing the affairs right and the stock of the company is showing some recovery while delivering a return of 7.94 per cent in a month and a return of 9.68 per cent over the last three months.
Whilst the recovery in Galaxy’s shares could be seen, another lithium processor- Orocobre is gaining an equivalent momentum with stock delivering 17.84 per cent in a month.
The reason for the rise could be somewhat similar to the reason behind the surge in Galaxy’s share, i.e., cost-cutting, value production, and planned expansion.
Orocobre Limited (ASX:ORE)
During the December 2019 quarter, the lithium chemical supplier responded to the market conditions by adopting cost-cutting measures to reduce the operating cost and increase profit margins. The company managed to reduce the cost of sales by 16 per cent on a quarterly basis to achieve a gross margin of 24 per cent. ORE is currently processing along with the development and growth at the Naraha Plant and Olaroz lithium facility.
Operations and Development at the Olaroz Lithium Facility
- Operational Performance
The lithium facility produced 3,586 tonnes of battery-grade lithium carbonate, up by 16 per cent against the previous quarter, but down by 5 per cent as compared to the previous corresponding period of December 2018 quarter (pcp).
ORE suggested to stakeholders that the fall in the production was in recognition of the current market conditions, which made the company narrow down its focus on process stability and product quality rather than high volumes.
The lithium carbonate sales surged by 6 per cent during the December 2019 quarter to stand at 3,287 tonnes, which also marked a surge of 9 per cent against pcp.
Orocobre realised an average price of USD 5,419 per tonne of lithium carbonate, which marked another fall for the year, and the average price fell by 24 per cent against the previous quarter and 49 per cent against pcp.
Despite higher sales, the drop in average realised price played its part, and the revenue for the quarter fell by 19 per cent against the previous quarter to stand at USD 17.8 million, which also remained 44 per cent lower as compared to pcp.
The gross cash margin stood at USD 1,310 per tonne, which remained 24 per cent of the net revenue (gross profit margin %). However, it remained 41 per cent down against the previous quarter but coupled with the fact that the revenue also fell by 19 per cent could be seen as decent and in line with historical gross margins.
In short, the cost of goods sold, was contained by the Company in this quarter.
Performance Snippet (Source: Company’s Report)
- Stage 2 expansion
As on 31 December 2019, ORE expended ~ USD 105 million on the first phase on expansion activities at the prospect, which also includes a pre-payment to suppliers of USD 30 million. The recent work conducted by ORE at the prospect includes;
Development across the brine transport system, rain diversion channels, commissioning of the secondary liming plant, and many others. The conversion of the lime plant into a slaking plant is expected to take place during Q3 FY20, which could reduce the operating cost.
- Liquidity position
As on 31 December 2019, company had cash of USD 171.9 million, out of which USD 11.1 million has been set aside as a guarantee for the Naraha debt facility.
(Source: Company’s Report)
- FY20 guidance
ORE anticipates the FY20 production to surpass the FY19 production by at least 5 per cent, and the company would announce the detail of average price for Q3 FY20 during the half-year result.
Development Across the Naraha Plant
The plant, which aims to convert industrial-grade lithium carbonate feedstock into purified battery- grade lithium hydroxide will be built in Japan, and the company would source the lithium carbonate feedstock of 10,000 tonnes per annum for the plant from the Olaroz Lithium Facility’s Stage 2 Expansion, which is expected to produce >99.0 per cent of industry-grade lithium carbonate.
Since construction, the company has seen no lost-time injury and periodic assessment over the risk measures is taking care to maintain the same.
As on 31 December 2019, ORE had spent ~ USD 39.3 million for the first phase of engineering, civil works, and procurement from Veolia. For now, more than 40 per cent of planned works have been completed, and the construction is expected by the company to accelerate during Q3 FY20.
ORE also completed the construction of storage facilities, wastewater treatment plant, related offices and laboratory, and liquid carbon storage foundations, along with many other such developments.
Orocobre last traded at $3.115 (as on 31 January 2020 3:20 PM AEDT), down by 1.73 per cent against its previous close.
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