Olaroz Stage 2 commissioning
Allkem (ASX: AKE) has updated the market on the progress of its Stage 2 capacity upgrade at its Olaroz lithium operations (Allkem’s interest 66.6%), together with updates on other projects. Increased mineral resources estimates were a key feature, lifting Allkem’s total group resources to 40 million tonnes of lithium carbonate equivalent (LCE). The improved mineral resource will support Allkem’s planned increased capacity for many years. The following image shows Allkem’s global asset base:
Source: Allkem (ASX: AKE)
Our hold recommendation for Allkem (ASX: AKE) remains unchanged.
Commissioning of Olaroz Stage 2 is now underway, with production scheduled for the December half 2023. Ramp-up to Stage 2 capacity of 25,000 tonnes of LCE is expected to take around a year. In 2023, Olaroz produced a record 16,703 tonnes of LCE, representing a rise of 30% year-on-year at a cash cost of US$5,014 per tonne. Realised prices for 2023 were a hefty US$46,172 per tonne. Production guidance for Olaroz’s for 2024 is forecast to be in the range of 22,000 tonnes to 26,000 tonnes of LCE.
In support of operations at Olaroz, the total mineral resource estimate increased by 10% on the previous number, to 22.63 million tonnes of LCE. The better mining quality measured category jumped 52% on the previous number, to 11.54 million tonnes of LCE. The following table shows the new mineral resource estimate by category (li – lithium, Li2Co3 – lithium carbonate, mg/l – milligrams per litre):
Source: Allkem (ASX: AKE)
Through extensive infill drilling across Olaroz, Allkem was able to lift much of its total resource into the high measured category, signifying the consistency in the brine pool. Our expectation is for the Olaroz brine to deliver a constant topping up of reserves in the years ahead, as further infill drilling is undertaken.
Mt Cattlin produced 130,984 tonnes of spodumene concentrate and was ahead of guidance for the year in the range of 114,000 tonnes to 124,000 tonnes of spodumene concentrate. Unit cash costs for 2023 can in at US$909 per tonne, while the realised price of US$4,879 per dry metric tonne. Guidance for 2024 is forecast to be in the range of 210,000 to 230,000 tonnes of spodumene concentrate.
Including the production of spodumene from Mt Cattlin, LCE guidance for the Group is forecast at approximate 50,000 tonnes. Group production is planned to reach 179,000 tonnes of LCE by 2028, which gives Allkem an excellent growth profile going forward. The following table is a synopsis of the path to 179,000 tonnes of LCE:
Source: Allkem (ASX: AKE)
The Sal de Vida project will complete in two stages with Stage 1 being 15,000 tonnes per annum of LCE and Stage 2 takes production to 30,000 tonnes. The stages will be developed sequentially. The project carries a capital cost of US$1.03 billion and is on track for first Stage 1 production in the December half 2025. Stage 2 is targeted for 2027. Sal de Vida will have an initial operational life of 40 years. Operating costs for Stage 1 are estimated at US$4,529per tonne and for Stage 2 US$4,003 a tonne. Operations at Sal de Vida are supported by a 1.7 million tonne LCE reserve and 6.9 million tonne resource.
James Bay will produce 311,000 tonnes of spodumene concentrate per annum over an initial 19 year operating life. The plant has a nameplate capacity of 2.0 million tonnes of ore per annum and carries a capital cost of US$381.5 million. In support of operations the mineral resource stands at 110.2 million tonnes of ore graded at 1.30% lithium oxide and ore reserves of 37.3 million tonnes graded at 1.27% lithium oxide. Construction is expected to take 19 months from receipt of provincial authorisation.
Allkem (ASX: AKE) has corrected sharply inline with other lithium players within the sector. The stock now rests on key support. Risk is skewed to the downside at present. If key support is broken, Allkem could extend lower towards the next important support level between $9 and $10. A rebound and breakout above $13 would confirm a bullish technical outlook with the uptrend remaining intact. For now, downside risk should be respected
Finally, to the Cauchari project which will produce 25,000 tonnes of LCE at an operating cost of U$4,081 per tonne over an initial operational life of 30 years. Operating margins, like Olaroz, could be substantial based on the current unit cost estimate and lithium price. Cauchari carries a capital tag of US$446 million and is slated for first production in the December half 2027. Supporting mining is an ore reserve estimate of 1.13 million LCE and a total mineral resource estimate of 5.95 million tonnes of LCE.
We believe Allkem has a clear pathway to hit, by 2028, production of 179,000 tonnes of LCE through the above projects. Given the nature of the mineral resource estimates across Allkem’s brine operations, we see opportunities to upgrade production at its fingertips.
On the merger with Livent Corp, Allkem has announced this is progressing through the conditions precedent to it completing. Required documents have been lodged with the US Securities and Exchange Commission. Foreign investment approvals, where required, have been obtained or will be prior to completion. The Scheme booklet and notice of shareholder meeting are expected to be forwarded to Allkem shareholders during November 2023 and a shareholder meeting should be called for the same month. The merger remains on schedule to complete by years’ end.  We continue to support the merger.
Allkem’s 2023 financial results made for excellent reading, following a surge in profits with records falling. Unfortunately, Allkem was not able to lever its operations into higher realised prices for 2023. The following image shows a snapshot of Allkem’s key reporting lines with all setting records (EBITDAIX – earnings before interest taxation depreciation amortisation and financial instruments):
Source: Allkem
Allkem (ASX: AKE) was the beneficiary of higher average realised lithium carbonate and spodumene prices for its product offerings, with Olaroz setting the pace. Product (LCE) sold out of Olaroz for 2023 reported an average realised price of US$43,981 per tonne free-on-board, representing a rise of 88% year-on-year (yoy). The average realised price for Mt Cattlin product for 2023 (spodumene concentrate) was US$4,879 per dry metric tonne, representing a yoy rise of 120%. The effect of pricing on the EBITDAIX line was a positive US$551.2 million for 2023. Revenue was a record US$1.2 billion, rising 62% yoy.
The balance sheet remains a key feature, with its quality in 2023 improving. As of 30 June 2023, net cash stood at US$568.5 million on debts of US$274.3 million and cash and equivalents of US$842.8 million. Net cash as of 30 June 2023 stood at US$368.2 million. Allkems’ cash ratio climbed to 19% up from the 14% reported from a year earlier. The balance sheet is financially sound and provides the ideal platform to support growth, given Allkem has a substantial development programme underway. We have no concerns around the balance sheets structure.
Allkem (ASX: AKE) did not pay a dividend and has a history of not paying. Instead, the funds have been channelled back into growing the balance sheet.
We have no concerns over Allkem not paying dividends, the share price appreciation is sufficient. At some stage, we will be looking to a dividend or share buyback to reward shareholders.
Disclosure: Interests associated with Fat Prophets holds shares in Allkem (ASX: AKE).
