E Rara Avis Reports

*Australian Orocobre (OROCF, or, more usefully, ORL-TSX) reported IFRS H1 results for the year ending June 30 today. Its first-ever after-tax profits came in at US7.4 mn as it produced 6,542 metric tonnes of lithium carbonate from its Olaroz lithium facility in Argentina, a rise of 309% from H1 2016. This produced revenues of $60.5 mn, up $56.1 mn from prior year H1. It sold 6,588 T of lithium carbonate at an averaged received price of$9,185/T.

The borax business saw sales rise 14% despite challenging conditions, and borates came close to breakeven in H1.

Gross operating margins hit 62% as Li production cost $3,525/T, excluding royalties and corporate costs. OROCF is one of the lowest cost Li producers on earth. Lithium remains in high demand with tight supply and attractive prices, despite the problems of Tesla and the new hot batteries. CEO Richard Seville said “prices have stabilised at high levels over the last few months. Strong global market fundmentals for lithium carbonate products persist.
He warned that “we recognise a similar scenario as occurred two years ago where timing and quantity of new supply to the global market was significantly overestimated.” The market price is from expecting more Li is coming than will come.

One reason is that Olaroz cut its production guidance for the current FY to 12,000-12,500 tonnes, namely flat, because of pond inventory management issues. The cut is required to keep the solar ponds producing the highest grades of Li which had fallen. To correct this flow problem and re-balance output to higher grades, the sequence design of the solar evaporation ponds will have to be changed over the next 6 months. Olaroz will reallocate how brine goes through the open air ponds and how long evaporation will go on for. It could have just pushed short-term production according to CEO Seville, but opted for “actively managing our operations for long-term performance.” .

That is also why Orocobre is doubling its production in Olaroz to 35,000 tonnes/yr, a project which had been discussed but is now confirmed. Its output will hit the market in ~2 years. OROCF is also building with its partner Toyota Tsusho, a sub of the car-maker, a high-margin 10,000 T/yr lithium hydroxide plant on which work will begin in Japan by the end of next year.

Capex for the rest of the year for Li will be $10-12 mn plus another $2.4 mn for the Borax Argentina mine. Future cash-flow rises will lead to the release of standby letters of credit in Argentina against overdraft facilities, and eventual repayment of shareholder loans from Toyota for $101 mn (as of the end of 2016.) Cash will also be used to fund expansion and improve its operations.

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