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Orocobre Limited shares crushed on production update

One of the worst performers on the market today has been the Orocobre Limited (ASX: ORE) share price.

In late afternoon trade the lithium miner’s shares are down almost 8.5% to $4.80.

Why are its shares sinking lower?

While heavy declines and strong gains are seemingly a daily occurrence in the lithium industry, today’s decline has been caused by the release of a disappointing announcement.

This afternoon Orocobre provided the market with an update on production at its Olaroz operation in northern Argentina.

According to the update, production at Olaroz during the March quarter was 2,802 tonnes, down 29% from 3,937 tonnes in the December quarter.

Management has blamed the lower production rate on evaporation rates that were 24% below those in 2017 with reduced solar radiation from cloudy conditions and above normal rainfall.

In order to extract lithium from brines, producers must first pump the salt-rich waters to the surface into a series of evaporation ponds where solar evaporation occurs over a number of months.

Unfortunately for Orocobre, Mother Nature was not on its side during the last quarter and evaporation rates were at the lowest levels experienced since 2011. Conditions did improve during March but did not recover to the level expected.

One positive, however, was that Orocobre ended the quarter with a realised average price of US$13,533 per tonne on a FOB basis. This was up 17% on the December quarter and led to total sales revenue of US$41.3 million.

Looking ahead to the current quarter, management expects production to be significantly higher quarter-on-quarter. But despite this, full-year production is now forecast to fall 10% short of its targeted 14,000 tonnes.

Will this happen again in the future?

Running an operation this way does put a company at risk of missing its guidance in times of adverse weather. So there is always a danger that this could happen again, even in the June quarter.

But in the long-term Orocobre should be better positioned to continue production in times like these. Management has pointed out that its plans for the Phase 2 expansion already include enhancements to the lithium carbonate processing plant and the potential use of evaporator/crystallizers during adverse weather events.

Should you invest?

Whilst I think it would be best to wait for the dust to settle and the release of its quarterly update later this month, I do think that Orocobre is attractively priced right now. Though, my preference continues to be industry peer Galaxy Resources Limited (ASX: GXY).

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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 Scott Phillips.

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