Allkem Ltd T.ORL

Dundee Capital Markets: Buy rating and C$3.10 target for ORL

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According to Dundee Capital Markets:

https://personal.crocodoc.com/1vYPoJn

Orocobre Ltd.

February 11, 2015

BUY, High Risk

Dundee target: C$3.10

Equity Financing Ensures Stability as Lithium Production Ramps Up

Conclusion: We reiterate our BUY rating with a reduced target price of C$3.10 from C$3.40 after including dilution from the proposed financing and removing potash from Olaroz Stage 1. Plans for a combined $50 MM equity financing, comprised of a $40 MM institutional placement component, and $10-$15 MM Share Purchase Plan (SPP) were recently announced:

• $40 MM placement to eligible institutional and sophisticated investors; 15.7 MM shares at A$2.55/sh, 13% discount to ASX halt price; James Calaway and Richard Seville looking to buy 267,563 and 100,000 shares, respectively.

• $15 MM SPP, underwritten to $10 MM, offered to existing shareholders; each shareholder can invest up to $15,000 at A$2.55/sh; Offer period commences on 16-Feb-15, and closes on 10-Mar-15 (Table 2, Schedule).

Use of funds: Proceeds will be used as a debt service reserve account, standby credit for Olaroz working capital, and corporate overhead (Table 1). The debt service reserve account will be reduced over time (along with debt principal) with cash eventually coming back to ORL. For Olaroz working capital Orocobre will be using an SBLC facility - meaning Olaroz will borrow in pesos with no hard cash ever entering Argentina. This is a typical structure foreign entities operating in the country. It represents 75% of project working capital with the remaining 25% (~$10 MM) coming from Toyota Tsusho (TTC). First sales proceeds are expected by June, but ramp up and qualification delays have necessitated the financing in light of the $2.5-$3.5 MM per month burn rate at the operation.

Final circuits commissioned at Olaroz. This included final purification and micronizing circuits (announced on 3-Feb-15, original guidance was Nov-2014). The entire lithium carbonate plant is now operating in continuous mode. We would view the event extremely positively if battery grade product could be achieved on its first few continuous runs, but for now we remain cautiously optimistic on ramp-up. Scheduled nameplate of 1,450 tpm (17,500 tpa) LCE in Q4/15, with ~20,000t of LCE in the circuit at various stages is planned.

Commercial production ramp-up is now underway with expectations for the first commercial dispatch at the end of March. Management told us it will likely be technical grade as customers can vet the product faster than battery grade (prices would be similar). Plans are to keep capacity low while samples are sent to customers, while studying operating processes, quality control, purity levels, and contamination. This plant is oversized compared to the current brine supply in circuit. The company has no major concerns with its ramp-up.

Production qualification process. LCE must first be qualified by customers, expected to take 3-6 months for battery grade, and 1 month for technical grade, before being sold. Product will be sent to 30 customers in Asia, Europe and US.

Partner TTC has finalized a number of contracts for 2015, with firm orders already provided. Volume and geography are largest drivers of price - not purity at the moment. The Olaroz plant is designed around production of 100% battery grade, but can produce technical grade. With relatively tight market conditions and little new supply expected over the next 1-2 years, ORL is set to benefit from a fast growing market (estimated at ~10% pa).

Full production assumption deferred: It will take time to reach nameplate of 17,500 tpa LCE - we expect about 12 months as several outside/environmental factors to help eliminate waste products through evaporation and crystallization are out of the company's control. We now expect 100% capacity in FQ3/16, or calendar Q1/16 (guidance of Q4/15), which is a two quarter push from our prior estimate. We forecast FY15 and FY16 production of 1,500t and 14,200t from 6,500t and 17,500t previously. We also remove potash production (20,000 tpa K) for the first two years until Olaroz Stage 2 (22,000 tpa LCE) ramps up later this decade. There aren't adequate buyers for potash in Argentina and Orocobre would rather invest in higher value lithium and boron extraction. Project NPV fell by ~$20 MM as a result.

Valuation changes. Of the $50 MM raise, $28 MM is set aside for Olaroz, in-line with our assumed $23 MM short fall. NAV improved to $412 MM from $389 MM, put dropped on a per share basis to $2.69 from $2.95 given dilution. Using a 1.2x multiple our target drops to C$3.10 from C$3.40 per share.