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Why the Orocobre Limited share price rocketed higher today

In early afternoon trade the Orocobre Limited (ASX: ORE) share price is the biggest mover on the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).

At the time of writing the lithium miner’s shares are up over 10% to $3.73.

Why have its shares rocketed higher?

This morning Orocobre reported a full-year net profit after tax of US$19.4 million.

This included an US$8.1 million impairment of its Borax Argentina business and also a gain on the sales of assets of US$14.8 million.

Despite the asset sale boosting its result, I believe it was still an impressive turnaround from the US$22 million loss it made in FY 2016.

During FY 2017 the company produced 11,862 tonnes of lithium carbonate and sold 12,296 tonnes at an average price received of US$9,763 per tonne. This led to total sales revenue of US$120 million.

Pleasingly, the miner is one of the lowest cost producers in the world and currently enjoys a gross operating margin of 62% with lithium production costs at US$3,710 per tonne.

Should costs continue to remain this low and lithium demand keep prices high, then Orocobre could be in a great position to profit in FY 2018.

Especially with management targeting production of 14,000 tonnes of lithium carbonate this year. That will be an 18% increase in production on FY 2017.

Though it is worth remembering that Orocobre was forced to downgrade its production guidance multiple times in FY 2017, so there’s no guarantee that it will deliver on its plans.

Should you invest?

While my preference in the industry remains Galaxy Resources Limited (ASX: GXY), closely followed by Kidman Resources Ltd (ASX: KDR), I do believe that if lithium demand forecasts are accurate then all three will prove to be great investments.

However, as with all resources shares, an investment in these companies is high risk and should be done with caution.

Where to invest $1,000 right now

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Motley Fool contributor James Mickleboro owns shares of Galaxy Resources Limited. 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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