April 5, 2018
BUY
Target: C$8.70 (from C$9.10)
David A. Talbot / (416) 350-3082
[email protected]
Joseph Fars, MBA, P. Geo / (416) 350-5090
[email protected]
Q3/18 Production Miss on Low Evaporation Rates
ORL-T: Price/Volume Chart
Production down 29% to 2,802t LCE versus our expectations of 4,000t. Lower production is to blame on 25% lower evaporation rates than was experienced in 2017. February 2018 rates were the lowest since 2011 as the average daily rate hovered around 4mm versus last year's 8.5mm per day. We see this as a feed factor into the plant, causing plant utilization to drop from 90% of Phase I design capacity in December quarter to 64% capacity. We don't believe issues have much to do with the plant, but simply the amount of concentrated brine material available from the evaporation ponds.
3,052t LCE sold versus our estimates of 4,000t. Revenue of $41.3 MM missed our $55.6 MM forecast. While no disclosure on unit cost of sales, gross margins are expected to be higher than previous quarter's $7,604/t LCE, driven mainly on record realized average LCE price of $13,533/t, versus previous quarter's LCE/t margins and prices of $7,000 and $11,415, respectively. Although we haven't clarified with management, it might be possible that some production rate was sacrificed in order to produce higher quality battery grade LCE which is able to fetch a higher price when sold.
Guidance revised down 10% to ~12,600t LCE from 14,000t LCE. Orocobre produced only 8,874t over the six months and expects to deliver ~3,725t by fiscal YE in June. We believe this to be reasonable based on where current brine feed concentrations are, up 20% YoY. Weather events are beyond the control of ORL, but this reaffirms that there is still room to improve on the robustness of operations and reduce production variability from weather impacts.
Additional $10MM required for evaporate crystallizers. Modifications to allow process route flexibility are planned. Additional $10 MM will be spent on evaporate crystallizers to "finish off" brine and allow for a more consistent feed into the Phase II. This would increase production to 42,500 tpa, but may be evaluated for current 17,500 tpa Phase I plant in order to mitigate downside risk for below average evaporation rates.
Capex/Opex assumptions increase marginally. We add $10 MM to Phase II Capex of $270 MM. FQ3/18 Opex was not provided, but we anticipate ~4,100/t LCE over the next six months. We also incorporate slightly higher Phase II Opex from 3,000/t to 3,100/t based on energy requirements for crystallization.
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