Allkem: Few surprises overall in the third quarter

About the author:

Max Vickerson
Author name:
By Max Vickerson
Job title:
Analyst
Date posted:
19 April 2022, 9:00 AM
Sectors Covered:
Industrials, New Energy

  • Allkem's (ASX:AKE) 3Q sales at Mt Cattlin were softer than we’d hoped with delayed shipments from the December quarter having less impact than expected.
  • Cash costs of production at both operating sites were also lower than our forecast though and we feel comfortable easing our long term assumptions.
  • We increase our price target to (login to view) and maintain our ADD rating with potential 12-m upside of 26%.

Mt Cattlin shipped less than our expectations but cash costs were lower

Mt Cattlin produced 48.6kt (+9% on our forecast) but with a lower grade of 5.4%Li2O (vs our expectation of 5.7%). Shipped volumes were lower than we’d hoped (-12%) though.

This lead to lower revenue from Mt Cattlin than expected (- 14% on our forecast) of $143.8m but this was still a 133% increase on the prior quarter. Sales volumes and revenue at Olaroz were inline with our expectations. 

Cash costs at both facilities were also lower than our expectations, -16% and -18% respectively but the company was also targeting lower product specifications at both sites. We noted the lower grade at Mt Cattlin already and Olaroz averaged 35% battery grade lithium carbonate which is lower than its target of 50/50 battery and technical grade.

Forecast and valuation update

We had allowed for some early production at Naraha during commissioning in the June quarter. We are now assuming no Naraha production until September and have reduced the expected December quarter Olaroz increase to 10% on pcp.

We think this is still aligned to guidance (commissioning Naraha this quarter with first production in 1Q23, first Olaroz S2 production in 1H23) but with a more conservative interpretation.

Given the lower product grade at Mt Cattlin we reduce our assumed average spodumene price received in FY22 and FY23 by 7% and 3%. This, along with the lower assumed production reduces our FY22 – 23 net profit forecast by 8% and 3%.

Partially offsetting this though is a reduction in our forecast cost of sales. We’ve eased our forecast (between 8% - 28% during FY22 – 24) given the recent performance and much lower forecast in AKE’s figures released at the investor day.

This lifts earnings in FY24 by 4% and our valuation by (login to view).

Investment view

AKE has been a strong performer in recent weeks but we continue to see long term valuation upside with persistent tightness in the lithium market. We maintain our ADD rating with 26% potential upside to this afternoon’s trading price ($13.52ps). 

We don’t think spot prices are likely to remain at current levels forever but we think there is still plenty of scope for contract prices to increase further before settling down into a long term average.

Price catalysts

AKE recently held an investor day so we don’t see major near term catalysts.

Updated guidance at the June quarter report could give the market more confidence in the near term outlook for contract prices and the company’s performance in bringing the Olaroz expansion online.

Risks

  • Lithium prices. 
  • Increasing EV demand to continue to drive battery material demand. 
  • AKE’s ability to deliver its growth projects on time and on budget. 
  • Operational performance at Olaroz and Mt Cattlin. 
  • Exploration and construction risk for growth projects. 
  • Interest rates, foreign exchange and tax regimes.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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