Prices for lithium products keep heading for the stars, but Allkem’s production profile is stuck on the launch pad.
The FY22 result was a record but merely in line with the market expectation. In fact, most of the heavy lifting was done by the record prices achieved for spodumene concentrate (+436% over FY21) and lithium carbonate (+369%). Underlying EBITDA was 8% below consensus at US$513.1 million, mostly due to higher selling costs and SG&A. Part of the reason for this was due to the merger that was completed in August 2021 and contributed to 10 months of the result.
At Mt Cattlin (WA), pricing for SC (spodumene concentrate) increased 527% from US$796/t in the September 2021 quarter to US$4,992/t in the June 2022 quarter. Customer demand is robust, and the price is expected to be over US$5,000/t in the September 2022 quarter.
AKE is expecting an average price of US$47,000/t in 1H23f for its lithium carbonate, excluding the Naraha (Japan) feedstock.
Guidance for FY23f at Mt Cattlin was disappointing compared to what was provide in July. Production is now expected to be 140-150kdmt (vs 160-170kdmt previously) with unit costs up proportionately to approximately US$900/t FOB (US$780-800/t previously). The sale of 130kt of low-grade ultrafine product will partially offset this.
Waste stripping has also been hindered by labour shortages and equipment utilisation.
First production at Olaroz is set for late 2H of CY22. No production guidance was given for this asset. The execution of the Olaroz Stage 2 project (91%) complete) will be important.
The Naraha lithium hydroxide plant in Japan was completed with first production due in early Q4 of CY22.
Investment view
AKE is certainly making progress on its new projects which we estimate will cost around US$1.5 billion and likely take longer than the 5-year horizon AKE is targeting.
There seems to be no loss of momentum in commodity pricing for spodumene concentrate or lithium hydroxide. This is unsurprising given the insatiable demand for these commodities for EV battery production.
But the obvious benefit of much higher prices is being dulled by the rising unit costs of production and the slower time frame for ramping up production.
In our view, the share price may have run ahead of its value for now, but that base value keeps rising.
Risk to investment view
The new project development pipeline carries significant risk in initial construction, ramp up and on-going 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 have retained our Hold recommendation.
