Orocobre Posts 48 Per Cent Decline in Quarterly Revenue, Total Sales Cost Reaches A Record Low

Summary

• The COVID-19 outbreak has added to the ever-growing problems faced by the lithium industry, which has been struggling in the past to deal with the supply glut.
• The lithium industry remained under oversupply conditions before and the COVID-19 outbreak, has further reduced the global lithium demand, adding considerable volatility across the lithium market, globally.
• The raw material market proved more resilient to the pandemic’s impact compared to mid- and down-stream cathode, battery, and electric vehicle (EV) manufacturing facilities, many of which ceased production.
• The decline in lithium chemical prices along with a reduced and limited demand further posed many headwinds for ASX-listed lithium chemical developers such as Orocobre Limited (ASX:ORE).
• Moreover, the Company reported a 48 per cent decline in its June 2020 quarterly revenue.
• However, while the Company witnessed a decline in the revenue, it remained focused on the cost reduction with the total sales cost reaching a record low during the same period.

The onset of the year 2020 posted more challenges to the sluggish lithium industry, which could be inferred from the deferment of lithium chemical shipment from primary lithium consumers, i.e., battery and EV manufacturers across China.

However, the raw material market proved more resilient to the pandemic’s impact compared to mid- and down-stream cathode, battery, and electric vehicle (EV) manufacturing facilities, many ceased productions.

Since the onset of the second quarter of the year 2020, lithium downstream operations have re-commenced and ramped up at variable pace across the globe, depending upon inventory levels and customer order backlogs and despite an economic slowdown the most highly sought after EV models continued to gain customer orders.

The EV sales across China remained robust despite an overall plunge, supported by the new EV subsidy program, support at the provincial level, and an easing of the COVID-19 restrictions.

However, the overall plunge in the global EV industry took the lithium chemical market into an aggressive sales offering by various spodumene and lithium chemical producers seeking to maintain cash flow, minimise unit costs, and/or grow market share at the expense of price, leading to price volatility in the lithium space, causing a significant decline in lithium chemical prices during the June 2020 quarter.

To Know More, Do Read: Lithium Production Volatility and Chinese Offtake Spree; Explosive Co Extends Offtake with Galaxy

The decline in lithium chemical prices along with a reduced and limited demand further posed many headwinds for ASX-listed lithium chemical developers such as Orocobre Limited (ASX:ORE).

The lithium chemical developer reported a 48 per cent decline in the quarterly revenue for the June 2020 quarter.

However, while the Company witnessed a decline in the revenue, it remained focused on the cost reduction with the total sales cost reaching a record low during the same period.

Orocobre Limited (ASX:ORE)

Olaroz Lithium Facility Quarterly Performance

The Company ceased operations at Olaroz on 20 March 2020 due to Argentina Government’s enactment of Decree of Necessity and Urgency (DNU) #297/20 and pursuant to Decree #520/2020 concerning COVID-19 outbreak.

The production at the facility re-commenced on 9 April 2020, after which, ORE commenced the expansion activities while maintaining the brine production, pond management and product deliveries throughout the restrictions.

• Despite reduced workforce, the plant stability and reliability improved, resulting in a decrease of unplanned maintenance events and repair turnaround time.
• ORE produced 2,511 tonnes of lithium chemical during the June 2020 quarter, which remained ~ 27.32 per cent down against the previous corresponding period (or pcp).
• Furthermore, the Company suggested that the scaling of production in response to reduced sales demand along with lower throughput rates enabled it to deliver reduced operating costs, partly offsetting the impact of reduced production on unit costs.
• The sales for June 2020 quarter reached 1,601 tonnes of lithium carbonate, in line with the Company’s expectations.

To Know More, Do Read: Orocobre Downgrades June 2020 Quarter Sales and Pricing Figures

• ORE released 19 per cent lower average prices against the previous quarter at USD 3,913 per tonne on a FOB basis, primarily due to significant market softness.
• Total sales along with the average realised price took the June 2020 quarterly revenue to USD 6.3 million, down by ~ 47.93 per cent against the previous quarter.

However, as the pandemic unfolded we have seen accelerated investment by some jurisdictions into electric transportation, it should improve medium to long-term benefits on the lithium industry, but it yet remains unclear, when the provided impetus to the lithium industry would reflect upon lithium chemical prices.

To Know More, Do Read: Supply Disruptions, Production Pullbacks, Increased Subsidies- The Trident of the Lithium Space

On the cost counter, the cash cost reached a three year low at USD 3,920 a tonne, down by 13 per cent against pcp, including USD 940,000 of COVID-19 related costs and USD 151 per tonne of export duties for the June 2020 quarter.

ORE further suggested that the gross cash margins for the quarter were at breakeven, excluding COVID-19 costs and export tax and remained down by ~ USD 800 per tonne against the previous quarter and USD 3,700 a tonne against the previous corresponding period.

The performance snippet of the Olaroz Lithium Facility for the June 2020 quarter against the previous quarter and pcp is as below:

(Source: Company’s Report)

• ORE largely focused on its reduced cost in the quarterly highlights and suggested that despite a nominal decline in sales and production volume, the total cost of sales reached a record low.
• The improvement in the fixed cost was primarily due to the reduction in contractors and consultants use, lower contracted energy price and site-related services.

The Stage 2 Expansion of the Olaroz Lithium Facility

ORE completed a significant review of the Stage 2 expansion project and estimated capital expenditure of ~ USD 300 million, excluding the working capital and VAT.

• As on 30 June 2020, ORE had spent USD 139 million on the first phase of activities with a construction completion rate of 40 per cent.
• During the June quarter, the Company inked an agreement with TTC whereby up to USD 60 million of the USD 135 million that was previously required to be restricted as a cash guarantee for the Stage 2 Mizuho loan can be used for Stage 1, and if required, these funds are for Olaroz related costs, scheduled debt repayments, to provide additional contingency funding.
• Furthermore, the Company mentioned that the remaining USD 75 million, along with any of the unused USD 60 million, would be restricted as a cash guarantee for the Stage 2 Mizuho loan until practical completion for Stage 2 is achieved.

The stock of the Company last traded at $2.960 (as on 3 August 2020), down by 0.33 per cent against its previous close on ASX.