It certainly has been a great start to the week for shareholders of lithium miner Orocobre Limited (ASX: ORE). Its shares have gone gangbusters today and are up by as much as 20% to $3.81 in early afternoon trade.
Today's gain is likely to be attributable to the company being upgraded by not one, but two leading brokers. Research notes out of Deutsche Bank and Macquarie this morning reveal that their respective analysts have upgraded Orocobre to buy ratings.
Despite Orocobre posting a reasonably weak first quarter of FY 2017 with production growing slightly and costs increasing quarter on quarter, this was largely disregarded by analysts due to a surge in lithium carbonate prices.
During the quarter the average price received was US$9,334 per tonne, up 24% on the previous quarter average price of US$7,535 per tonne.
Although costs increased to US$3,579 per tonne, the price increase means the company is enjoying a gross cash margin of US$5,755 per tonne. This is up a massive 45% from US$3,980 per tonne in the previous quarter.
This led to Orocobre producing positive operating cash flow during the quarter, something it now expects to be an on-going feature of the business according to management.
It's not a surprise then to see its share price rally today. Especially with 7.5% of its shares being held short as of last Monday. No doubt those short sellers will have rushed to buy shares today to close positions.
So should you invest? As with all commodity-based businesses it all depends on where you see prices going in the future.
Management feels confident that lithium carbonate prices will remain at high levels for some time to come thanks to supply side constraints and the strong demand for its use in the batteries of smart phones, laptops, and electric vehicles.
If management is on the ball with its forecast then I think Orocobre and its rivals Galaxy Resources Limited (ASX: GXY) and Altura Mining Ltd (ASX: AJM) could prove to be great long-term investments.
But should high prices encourage more miners into the space and cause supply to pick up, lithium carbonate prices could come tumbling down. This would no doubt spell trouble for their respective share prices. So approach with caution – would be my advice.
