Allkem: 4Q points the way to strong FY23

About the author:

Author name:

By Max Vickerson

Job title:

Analyst

Date posted:

21 July 2022, 8:31 AM

Sectors Covered:

Industrials, New Energy

• Allkem (ASX:AKE) delivered record operating cash flow in 4Q22 as contract prices rose, as expected, in a very tight market for lithium.
• Higher production will lift revenues and earnings in FY23 as Naraha and Stage 2 Olaroz come online while prices remain elevated.
• We maintain our ADD rating and we see strong upside potential with the current share price factoring in long-term prices much lower than contract or spot.

Record revenue in June

Olaroz achieved record revenue in the last quarter as contracted lithium prices continue to rise. Average prices for lithium carbonate (USD41,033/t) were 3% higher than guidance and led to record revenue of USD141m. Prices in 1Q23 are expected to be similar.

Mt Cattlin’s production was down 49% qoq as guided and just slightly lower than our forecast (-2%). Revenues were stronger than we expected (+20%) though with higher prices for the average 5.4% grade product than we’d allowed.

AKE anticipates even higher pricing this quarter given ongoing tight conditions. The company also guided to a much stronger FY23 than we’d expected with production guidance in the range of 160kt – 170kt (mid-point 31% higher than our forecast).

Strong EV demand suggests ongoing market tightness

We have only noticed minor pullbacks in spot prices which was confirmed by AKE identifying carbonate and hydroxide price drops of 8% and 5% in the June quarter. Spot prices are still well above contract price levels and AKE estimated EV sales were up 50% on pcp in the quarter.

The dominance of LFP chemistry (~55% share) in the world’s largest EV market (China) suggests demand for AKE’s lithium brines will continue to be strong.

While AKE has suggested September quarter carbonate pricing will be flat, we understand that with the Naraha plant coming online ahead of the Stage 2 Olaroz expansion, the mix of battery grade vs technical grade may skew towards the lower value product in order to feed Naraha.

As Stage 2 ramps production in 2H23, we anticipate that AKE will be in a better position to optimise pricing.

Forecast and valuation update

We have lifted our forecast production levels for Mt Cattlin in line with guidance in addition to the higher expected costs. The net effect is an increase in FY23 EPS by 6cps. Additionally we have trimmed our price expectations for Olaroz in 1H23 which reduces EPS by 4cps.

We have also deferred our assumptions for the timing of first cash tax payments given 4Q’s stronger-than-expected cash flows.

The net effect of these changes is to increase our target price to (login to view).

Investment view

AKE holds long lived brine assets that are well leveraged to the lithium carbonate price and Mt Cattlin looks to be highly profitable for its remaining life with high exposure to the spot market. Additionally the Naraha plant will give the company exposure to lithium hydroxide prices in addition to spodumene and carbonate.

We believe that the strong cash flows we’re anticipating in FY23 will make the value proposition more compelling than the uncertainties of the lithium market. We maintain our ADD rating with potential 12-month upside of 69% but we note that the lithium market is still developing and comes with higher risks.

Price catalysts

• Potential for further FY23 guidance in FY22 financial results in August.
• Evidence of Olaroz stage 2 expansion on track in 2Q23 report.

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.

Find out more

If you would like more information, please contact your adviser or nearest Morgans office. 

Need access to our research?

You are also welcome to start a two-week trial of our online platform, which provides access to detailed market analysis and insights, provided by our award-winning research team. 

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.