Allkem: Healthy run but still room for upside

About the author:

Author name:

By Max Vickerson

Job title:

Analyst

Date posted:

26 August 2022, 8:30 AM

Sectors Covered:

Industrials, New Energy

• Allkem's (ASX:AKE) FY22 net profit beat was in-line with our forecast (+1%) despite a miss at the EBITDAIX level.
• Management have pointed to a mixed outlook for FY23 with higher pricing at Olaroz but also lower production at Mt Cattlin.
• We maintain our ADD rating and update our price target to (login to view).

Solid FY22, mixed view this year with next year looking solid

EBITDAIX (earnings before foreign exchange gains/losses, business combination costs, impairments and ITDA) of $513m was a huge step up on last year but missed VA consensus (-7%) and our forecast (-8%). Net profit was in-line with our forecast but tax costs were significantly lower than we’d expected due to the company utilising previously unrecognised tax losses.

Guidance for production at Mt Cattlin was cut by 12% from a range of 160-170kt down to 140-150kt as ongoing impacts of COVID and WA’s tight labour market have delayed the stripping of the 2NW pit which will reduce production of export grade spodumene concentrate.

Sales will be supplemented with 130kt of lower grade material but with materially lower margins due to the lower quality. Head grade is expected to improve to historical averages in FY24 with a corresponding increase in production.

Olaroz pricing guidance has been lifted 15% to average $47k/t for carbonate in 1H23. This excludes volumes which will be sent to Naraha for conversion into hydroxide. AKE is not providing production guidance until Stage 2 has ramped up.

Mt Cattlin weighing on short term but also flowing through higher costs

On balance, we expect the reduction in Mt Cattlin’s production to outweigh the pricing improvements at Olaroz. After adjusting for the carbonate higher pricing in 1H as well as the reduced production our net profit forecast falls by 4%. 

In FY24 - 25 we’ve lifted our forecast Mt Cattlin output but kept our assumption steady of softening spodumene prices so those tonnes are less profitable. We’ve also slightly reduced our technical grade brine price forecasts bringing our long term average price down to USD20k/t.

The run rate of Corporate overheads jumped significantly in 2H (+77% hoh) and the proportion of selling costs to revenue also increased. We have allowed for the higher run rate and have increased our estimates for royalties and duties.

The overall impact is a decrease in our valuation of 8% and we round our price target to the nearest 10cps, bringing it to (login to view).

Upside available to base case and future projects could deliver more value

We still see value upside at today’s closing price despite the recent rally. If AKE can provide more detail on its potential future expansion projects like Olaroz S3 and the potential downstream projects for James Bay then we think the market is likely to allow for further growth.

We maintain our ADD rating with 12% upside to our target price. Despite the large increases in cash flow we don’t expect AKE to commence paying a dividend in FY23 while its capital expenditure is elevated.

Price catalysts

• Evidence of Olaroz stage 2 expansion on-track during 1H23.
• An increase in Mineral Ore Reserve at Mt Cattlin could potentially extend the life of the operation.

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, inflation, foreign exchange and tax regimes.

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