Allkem Ltd T.ORL

Deutsche Bank: Buy rating & A$3.30 target for Orocobre Ltd.

[shakerman640]

According to Deutsche Bank:

https://personal.crocodoc.com/lFMqvex

Orocobre

Rating: Buy

Price target - 12mth: $3.30 AUD

Ramp-up raising

$50m raising for working capital and corporate

Given a slower than planned construction and commissioning period, ORE has announced a $50m raising, largely to fund its share (66.5%) of Olaroz working capital. It will also cover JEMSE's (the provincial government) 8.5% share. Encouragingly, first lithium carbonate has been produced which should allow samples to be sent to 30 customers with a 3-6 month product approval process to follow. We have adjusted for the equity risk dilution (13% below last close and 29% below our previous TP of $3.60/sh) and revised our production ramp-up. Our TP (DCF based) is now $3.30/sh. We see valuation upside and like the fundamentals of lithium with strong forecast demand growth.

Olaroz commissioning now complete, product qualification begins

First primary lithium carbonate was produced in November. In early February, ORE announced that the final two stages, micronising and purification, have been commissioned allowing final lithium carbonate production suitable for product qualification. ORE expects a ramp up to the full run rate of 17.5ktpa by the end of 2015; we assume a 6 month delay to mid 2016 at this stage.

Latest capital raising could be the last but depends on ramp up and Phase II

ORE will add 20m shares (132m shares previously on issue) in a A$50m raising. Funds will mainly be added to the Olaroz JV for working capital, feasibility and resource studies and for ORE corporate costs ($8.5m to be added, equal to one year spend). ORE had $19m in cash at the end of December 2014. ORE’s cash position will decline (corporate costs) until first dividends are received from the Olaroz JV; we assume this occurs in mid 2016.

Phase II accretive on our forecasts but funding uncertain at this stage

Olaroz is the first greenfield lithium brine operation in 20 years. In our view further expansions are value accretive, with ORE well positioned to capitalize on strong lithium demand as the world becomes more dependent on lithium ion batteries. An expansion to 35ktpa (from 17.5ktpa) for an assumed US$150m (c.60% of US$229m Phase I capex) would add $1.15/sh to our NPV.

$3.30/sh PT (previously $3.60/sh); maintain Buy

Our PT is in line with our DCF (12% nominal discount rate and LT US$6.50/kg LCE, 0.80 and 11.1 USDARS). Downside risks include higher capex, a slower ramp-up than expected, lower lithium price or a delay to Olaroz dividends to ORE which the company expects to occur from mid 2016 (see page 4).