Allkem: Prices then production to lift in CY22

About the author:

Chris Brown
Author name:
By Chris Brown
Job title:
Senior Analyst
Date posted:
01 March 2022, 12:30 PM
Sectors Covered:
Junior (Emerging) Resources

  • Allkem (ASX:AKE) reported 1H22 underlying net profit after tax of $57m (Morgans forecast $73m, Factset consensus $86m) which was impacted by the timing of merger.
  • Pricing is expected to rise at both Mt Cattlin and Olaroz as legacy fixed price contracts roll over into market linked pricing. The Naraha lithium conversion plant is nearing completion and the Olaroz expansion is on track for next half.
  • We maintain our ADD rating and upgrade our target price to (login to view).

Solid first half performance with tailwinds for the second

Underlying net profit for 1H22 was $57m which was a combination of six months of Olaroz and four months of Mt Cattlin from the time of the merger. AKE also acquired a significant amount of cash as part of the merger though which pushed free cash flow well above our expectations ($170m actuals vs $47m forecast).

Statutory net profit was $13m, driven lower by one off items ($13m acquisition costs, $18m contract related amortisation and inventory movements) and $24m of non-cash charges related to impact of exchange rates and inflation on Argentine tax charges. This was offset by $13m in fair value changes in financial instruments.

Pricing is expected to rise with average March quarter spodumene concentrate (SC6) prices set to increase to $2500/t ($1595/t last quarter) and 2H22 lithium carbonate (LiCO) to $25k/t ($12.5/t last quarter). Management wasn’t committing to any June quarter spodumene guidance yet but we expect that if spot market pricing does not decrease that there will be further significant increases.

Expansion projects are on track with mechanical completion of Naraha expected this quarter and first production this half. The Olaroz Stage expansion is expected to begin to deliver additional volume progressively starting next half.

Adjustment to outlook

AKE has highlighted the additional costs it is expecting at Mt Cattlin with cash costs to increase from an average of $344/t in CY21 to between $400/t - $430/t. This is mostly being driven by higher strip ratios rather than COVID impacts on the WA mining sector so we don’t expect much relief when the WA borders open.

We lift our FY22 gross profit forecast by $74.3m on higher expected pricing but lower our net profit forecast because of the one off and non-cash charges in 1H.

Our FY23 and FY24 net profit forecasts are lower on higher Mt Cattlin mining costs.

Forecast and valuation update

We rolled forward our model and update for the much larger cash position than we’d anticipated. This lifts our valuation to (login to view).

Investment view

AKE is a pure play lithium producer with diversified products (spodumene, LiCO and borax) and geographies (WA and Argentina) that is set to expand. The almost completed Naraha plant will allow AKE to grow vertically into the lithium hydroxide market, supported by increased Argentinian brine production.

The lithium market has seen strong price increases in CY21 but we don’t see signs of a break to this momentum yet. We expect EV demand to remain strong with geopolitical events and a potentially tight oil market accelerating the shift towards electrification.

We maintain our ADD rating with an increased price target of (login to view) with 12-m potential upside of 63%.

Price catalysts

  • Updated price guidance at the 3Q report in April.
  • Successful completion of Naraha and production ramp in 1HFY23.

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.
  • Interest rates, foreign exchange and tax regimes.

Find out more

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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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