Allkem: Investor day highlights future production growth

About the author:

Max Vickerson
Author name:
By Max Vickerson
Job title:
Analyst
Date posted:
06 April 2022, 8:30 AM
Sectors Covered:
Industrials, New Energy

  • Following last night’s release of substantial upgrades to its lithium resources Allkem (ASX:AKE) is targeting higher production from Sal de Vida and flagged an eventual stage 3 expansion for Olaroz.
  • We have increased our production and capital expenditure forecasts accordingly which lifts our valuation to (login to view).
  • We maintain our ADD rating with potential upside of 24%.

Resource and production outlook upgrades

The total lithium resource at Olaroz was upgraded to 16.2Mt LCE (+153%). AKE will work on developing a third stage expansion plan and will consider the suitability of alternative production technologies like Direct Lithium Exchange (DLE).

We will wait to see more detail before factoring this into our numbers and any potential further upside. 

Sal de Vida’s total resource was upgraded to 6.9Mt LCE (+10%) with increasing confidence as Measured and Indicated categories increase by 27% and 45% respectively. 

Sal de Vida Stage 1 planned production capacity increased to 15ktpa (from 10.7ktpa) along with increased capital expenditure. The second and third stage expansions are planned to be combined into a 30ktpa project that will move into pre-feasibility next year.

Market split on price forecasts

AKE referred to battery and technical grade carbonate price forecasts from Wood Mackenzie in its economic analysis. These forecasts allow for steeply rising prices into 2023 before falling back towards an eventual steady state $19k/t and $14k/t in real terms.

This is significantly higher than the Visible Alpha consensus forecasts prior to the investor day.

Our long term price forecasts exceed these numbers ($27k/t and $22k/t) but do not allow for escalation with inflation. This impact is significant given the 40 or more year asset life of the brine projects and our valuation would be higher if we reverted to the Wood Mackenzie numbers with 2% annual inflation.

Forecast and valuation update

We have retained our pricing assumptions at this point but have updated our forecasts to allow for the higher expected production from Sal de Vida and the corresponding higher capital expenditure.

The high expected return on the larger Sal de Vida investment increases our valuation to (login to view).

Investment view

We maintain our ADD rating given the strong growth outlook for the company and the potential 24% upside to our valuation.

AKE’s diverse products and geographical mix adds opportunities to capture value as the market evolves. There is further potential upside that are not in our numbers such as Olaroz stage 3 and/or another lithium hydroxide plant.

Should the lithium market continue to remain strong AKE still has a large amount of untapped growth potential.

Price catalysts

Given the pricing and production guidance upgrades there may not be many immediate catalysts on the horizon.

We think the successful completion of the Naraha facility and steady ramp up of the Olaroz stage 2 expansion in the next 6- 12 months could give the market more confidence in AKE’s growth outlook.

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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