The 2021 merger of Orocobre and Galaxy became Allkem – a 45kpta lithium producer from two assets in WA and Argentina. The pipeline of projects could more than triple its LCE production, but the risks go up too.
The current AKE business has two operations producing approximately 45kpta of lithium carbonate. The Olaroz brine operation in Argentina produces ~14-17ktpa of industrial and chemical grade lithium carbonate while the Mt Cattlin spodumene mine in WA produces about 200ktpa of spodumene concentrate (~25ktps LCE).
Unlike Australia which is exclusively a hard rock producer of lithium compounds, Argentina (and Chile) have exclusively brine deposits of the metal. These brine bodies are formed in basins where water has leached lithium from surrounding rock. The lithium brine is extracted to ponds where evaporation leaves a lithium product that is processed into lithium carbonate (Li2CO3). This can be further processed into lithium hydroxide (LiOH).
The existing Olaroz brine operation in Argentina (AKE 66.5%) is yet to reach its Stage 1 nameplate capacity of ~17.5ktpa. The construction and production ramp up had numerous setbacks (~7 years to effectively ramp up) so there is obvious concern about the prospects for the Stage 2 brownfield expansion to a total of 40-45ktpa lithium carbonate. Even so, there is strong potential for a Stage 3 expansion due to the scalability of the project. AKE’s main partner in Olaroz is Toyota Tsusho (TTC) which effectively owns 25% but also has the sole and exclusive rights to market and sell all lithium products from Olaroz. The significant resource at Olaroz and the neighbouring Cauchari project could support potentially decades of production at the Stage 2 rate. Stage 3 is in a scoping study phase for an additional 25-50ktpa production.
At full Stage 2 production, about 9.5ktpa of product is expected to be used as feedstock for the Naraha Lithium Hydroxide plant in Japan. AKE owns 75% of this plant in a joint venture with TTC. The plant is under construction with first production due in 1H23f. Again, TTC has the sole and exclusive rights to market and sell the LiOH from the plant for 20 years.
In Western Australia, AKE’s 100% owned Mt Cattlin spodumene operation is an open pit hard rock operation with a concentrator. Processing capacity is about 1.6mtpa of Li2O which is then processed into a spodumene concentrate grading at 5.6-5.8% Li2O. Current reserves support a 3-year remaining mine life, but further drilling could extend this to around 2028.
AKE owns two further ‘lithium’ assets at Sal de Vida (Argentina) and James Bay (Canada). First production from the US$800 million Sal de Vida is expected in late 2023 with a four year ramp-up to full capacity of 45ktpa in a two stage development.
The James Bay spodumene project in northern Quebec could have a 19-year mine life with average annual production around 320ktpa of 5.6% Li2O spodumene concentrate. A feasibility project estimated a US$283 million development cost with life-of-mine operating costs at US$333/t. We think FID and construction in early 2023 can lead to first concentrate production by mid-2024.
Investment view
The Argentinian aspect makes AKE unique amongst the Australian listed lithium producers under our coverage. AKE has exposure to low cost, scalable and long-life brine operations with a pipeline of brownfield and greenfield growth options. Elevated lithium commodity prices are expected to ease as new supply becomes available, but long term prices are supported by demand for EV batteries which contain significant amounts of lithium.
All up, however, we estimate total project expansion will cost AKE around US$1.5 billion and the anticipated 5-year time horizon could realistically be longer.
Risks to investment view
The new project development pipeline carries significant risk in initial construction, ramp up and ongoing operational considerations. Commodity price assumptions could change and affect the potential return on investment for existing and new projects. Argentina carries higher operational risk, in our view, given the history of the existing project.
Recommendation
We initiate our coverage of AKE with a Hold recommendation.
FIGURE 1: CONSENSUS EARNINGS FORECASTS
FIGURE 2: CONSENSUS FINANCIAL FORECASTS
