Allkem’s blushes on the production front are being masked by continuing big prices for spodumene concentrate and lithium carbonate.
Olaroz (lithium carbonate, Argentina). Production of 3,289kt was -5% on the June quarter while cash costs increased 6%. Sales of 3,721 tonnes generated revenue of US$150 million at an average realised price of US$40,317/t, including some technical grade sales to the Naraha (Japan) project. The Naraha transfers had an unexpectedly large impact on the average price received and this will become a point to watch as the conversion costs to battery-grade hydroxide product will impact on margins.
The Olaroz Stage 2 expansion has been delayed. First production was expected in late CY22, but some critical items have held up the project. Capex has increased to US$425 million, and first production is now timed for Q2 of FY23. For the full year, Olaroz will contribute a record year from Stage 1, plus a slightly smaller amount than anticipated from Stage 2.
Mt Cattlin (spodumene concentrate, Western Australia). Production of 17,606dmt in the quarter was -29% on the June quarter. The realised price of US$5,028/t was similar to the June quarter resulting in revenue of US$107 million. AKE received an extra US$35 million revenue from shipment of 59kt of low grade spodumene concentrate.
Cash costs were lower than expected at US$796/t and well below FY23f guidance of US$900/t. Full year production from Mt Cattlin is looking like it may fall short of the already reduced FY23f guidance of 140-150kt.
Investment View
Lithium prices of all varieties keep heading higher, but AKE is making things difficult for itself through a range of production issues. The Olaroz Stage 2 project is experiencing similar issues to other greenfield/brownfield projects in South America, but it still detracts from the near term attractiveness of the expected earnings. Despite being a mature project, the Mt Cattlin geology is still proving mercurial with basalt contaminants the latest obstacle.
Capex levels continue to creep upwards including for the new projects at Sal de Vida (Argentina) and James Bay (Canada).
Production and development delays in general are creating a higher level of risk for AKE, hence we maintain our Hold recommendation.
Risks 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.
