Allkem: Solid 2Q and still plenty of upside

About the author:

Author name:

By Max Vickerson

Job title:

Analyst

Date posted:

19 January 2023, 7:30 AM

Sectors Covered:

Industrials, New Energy

• Allkem (ASX:AKE) performed solidly overall in 2Q with production at Olaroz ahead of expectations but Mt Cattlin output will skew to the second half.
• Headwinds are expected from the removal of Argentinian government export incentives and we anticipate a slower growth in carbonate production.
• We maintain our ADD rating with the stock trading significantly below our revised target price of (login to view). We expect lithium pricing to remain strong for the remainder of this year. If it does, we anticipate that the correspondingly strong financial performance would lead to a re-rate.

2Q overview

Production at Olaroz beat forecasts (+6% on Morgans, +18% on Visible Alpha consensus) but sales slipped. This is largely a temporary issue with late shipping of some tonnes pushing a portion of sales into the current quarter.

Mt Cattlin production fell well short of expectations (-43% on Morgans, -45% on VA) but again temporary issues were the key drivers and are expected to reverse in 2H. Ore stripping is continuing with mined volumes increasing 24% qoq. AKE expects to meet it’s full year production guidance.

Pricing looking stronger but costs higher as well

Prices achieved for spodumene and third party carbonate prices were ahead of our expectations. AKE achieved $5,284/t for 5.3% concentrate (+6% on our forecast) from Mt Cattlin and ~$53k/t for third party carbonate sales from Olaroz.

AKE anticipates a 5% increase this quarter for pricing at Mt Cattlin and flat pricing for Olaroz. The implied $6k/t SC6 CIF benchmark is similar to the $6.3k/t benchmark published by PLS.

AKE also reported that it expects a repeal of Argentine government incentives for export industries. The impact could be as high as 4% of gross margin. The timing and details of the change are yet to be determined.

Forecast and valuation update

We have reduced our carbonate production expectations, primarily in FY24, from an assumed slower ramp up of Olaroz Stage 2 and AKE’s expectation of Sal de Vida first production by mid-2024 (six month delay).

We also anticipate stronger average lithium prices in the short to medium term. Contract prices are still catching up to the much higher spot prices seen in the last year, even as they soften marginally. AKE is not alone in experiencing delays bringing on new production and as a result we see continued pricing support.

The net effect of forecast changes reduces our target price to (login to view) as the long term impact of the lost export incentives outweighs the medium term earnings boost from higher expected prices.

Investment view

Our base case assumptions point to significant upside and we therefore retain our ADD rating.

We do note though that the sector is volatile and very sensitive to the commodity price outlook.

In a scenario where prices fall faster than we expect, e.g. to the low end of consensus out to FY25, our valuation would fall to (login to view) but we estimate much higher sensitivity if lower prices were factored into long term expectations.

Price catalysts

• Release of the 1H financial results in February.
• Resource and reserve updates at Mt Cattlin.
• Updates to the growth project pipeline.

Risks

• Lithium prices.
• Increasing EV demand to continue to drive battery material demand growth.
• Operational performance at Olaroz and Mt Cattlin.
• Exploration and construction risk for growth projects. 
• Interest rates, inflation, government regulation, 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.