The Orocobre Limited (ASX: ORE) share price has continued its disappointing run on Tuesday and has sunk deep into the red.
At the time of writing the lithium miner’s shares are down over 3.5% to a 52-week low of $3.29.
Why are Orocobre’s shares at a 52-week low?
As well as coming under pressure along with the likes of Galaxy Resources Limited (ASX: GXY) and Kidman Resources Ltd (ASX: KDR) in recent weeks due to softening lithium prices, Orocobre’s shares have dropped lower today following the release of its quarterly update.
That update revealed that production for the first quarter came in at 2,293 tonnes of lithium carbonate. While this was a 7% increase on the prior corresponding period, it was down 36% on the fourth quarter of FY 2018.
This was largely expected due to the shutdown of its plant for two weeks and seasonally lower evaporation rates.
Orocobre reported sales revenue of US$32 million, which was up 36% on the prior corresponding period. The average price of its lithium that was realised during the quarter was US$14,699/tonne on a free on-board basis.
This is an improvement on the June quarter which had a realised average price of US$13,653/tonne on a free on-board basis.
However, management doesn’t expect prices to remain at this level in the current quarter. It advised that: “pricing achieved in the December quarter will be below that achieved in the September quarter, however the pricing achieved for the December half year is not expected to be materially less than the June half year.”
This is likely to mean a reduction in its gross margins which hit record levels in the September quarter. With cash costs at US$4,640/tonne, Orocobre enjoyed a record gross cash margin of US$10,059/tonne. This was a 62% increase on the prior corresponding period and 2% higher than the June quarter.
The strong gross margins meant the company finished the quarter with net cash of US$221.7 million.
Looking ahead, management didn’t give any concrete guidance, but reiterated that it expects full year production to be higher than that achieved in FY 2018. And its December quarter production is expected to be materially higher than the September quarter.
Should you invest?
While I think that both Orocobre and rival Galaxy are quality producers and have world class assets, a successful investment will ultimately come down to whether lithium prices sink lower, stabilise, or climb higher.
I am optimistic that demand for lithium will increase significantly ahead of supply and support prices, but until this is proven and reflected in the price of the battery-making ingredient I suspect their shares will remained under pressure.
Because of this, I would suggest investors look at more diversified miners such as BHP Billiton Limited (ASX: BHP).
When a veritable investing and entrepreneurial genius speaks, it pays to listen.
In fact, he's now preparing a $100B "war chest" to invest entirely in this "terrifying" new technology, which could spell huge profits for investors.
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.