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Why the Orocobre Ltd share price is up 133% in 6 months

Tesla Model S
Source: Wikimedia Commons

Orocobre Limited (ASX: ORE) has seen its share price surge 133% in the past six months, as it gets ever closer to nameplate (another word?) production in September 2016.

The lithium producer has built the first large-scale, brine-based lithium project in over 20 years at its flagship Salar de Olaroz project in Argentina. Orocobre has an effective 66.5% interest in the project, with partner Toyota Tsusho holding 25% and JEMSE 8.5% (The provincial government’s mining investment company).

The project is planned to produce 17,500 tonnes per annum of low-cost battery grade lithium carbonate at nameplate capacity – and achieved breakeven operating costs in January 2016.

Olaroz produced 2,332 tonnes of lithium carbonate during the first three months of the year, including 872 tonnes in March 2016. Q2 production is expected at 3,000 tonnes. For the 9 months to end of March, Orocobre had received $21 million in receipts from customers, although is still operating at a loss.

At the same time, Orocobre has benefitted from favourable Argentine policy changes, including the effective floating of the Argentine Peso, elimination of export duty on high-grade lithium and refined boron products (5%) and duty (10%) on boron mineral concentrates. The government has also removed controls on the importation of goods into Argentina.

Lithium carbonate prices have also soared from US$5,000 a tonne in 2014, to an expected US$7,500 a tonne in the second quarter of FY16, with further growth in Q3 and Q4. That’s mostly due to high demand for lithium and very tight supply. Demand is expected to continue outstripping supply with a number of firms in the process or planning to construct massive rechargeable battery megafactories including car maker Tesla.

Lithium supply and demand

Source: Orocobre presentation

 

As a result, Orocobre has plans to double output from Olaroz with a stage 2 expansion at a cost of around US$140 million. Expansion studies begin this quarter with potential development starting in 2017.

Foolish takeaway

Investors will want to know when Orocobre finally becomes profitable, but should expect the company to plough most of its profits back into expanding lithium production – at least in the early stages.

But if lithium prices continue to rise as expected, shareholders could be well rewarded.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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