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Commodities

(AKE) reported positive FY22 results despite the ongoing impacts of Covid-19

Investment Thesis:

  • Strong and solid fundamentals with robust lithium demand and prices to persist. As expected, lithium demand growth to support pricing and be driven by: (1) long lead times for lithium mines and hence potential short-term supply constraints; and (2) growth in new electric vehicle and hybrid vehicle sales especially in China. 
  • High quality assets operated by a solid management team with appropriate expertise. 
  • Expansion of Olaroz is expected to significantly increase capacity of lithium carbonate, resulting in strong cash flow generation. 
  • Improving production and operational efficiency at Mt Cattlin in the short term should result in significant cash flow generation. 
  • Development of Sal de Vida, as the asset could add more than $3.40 per share to AKE’s value.
  • Development of the James Bay lithium pegmatite project in the long term.
  • Solid balance sheet. 

Key Risks:

  • Commodity price volatility. There is no formal market for lithium with the pricing of lithium products determined by private negotiation between producer and end user. 
  • AUD/USD movement. Prices for lithium products are denominated in US dollars, so earnings translation into Australian dollars can be affected by wide fluctuations US/A$ cross rate. 
  • Adverse weather impacts. The Company’s projects are located in areas that can be subjected to severe weather events such as snow falls, which may adversely impact the company’s operations and earnings. Lack of exploration success. Despite AKE already successfully identifying resources and reserves, geological complexities may arise that may inhibit the future inclusion of further resources and reserves.
  • Metal processing issues. Any issues with the metallurgical processing equipment may impact the company’s earnings.
  • Stability of government policy. Whilst the political climate where AKE assets are based are currently stable, to remain cognizant of any changes especially nationalization of assets and increased taxes. Moreover, the VAT refund received by AKE.
  • Execution risk/processing issues. Any issues with the pond’s system, processing or execution risks may impact the company’s earnings. 

Key Highlights:

  • Relative to the pcp and in US$: Despite the ongoing impacts of Covid-19, revenue of $769.8m was driven by record annual production volumes and operating profits at Mt Cattlin and Olaroz, improved and higher prices, strong cost control, and the merger with Galaxy Resources. Olaroz contributed $292.8m, whilst Mt Cattlin (in 10-months), added $451.9m in revenue.
  • Mt Cattlin saw record revenue from sales of 200,715 dry metric tons (dmt) of spodumene concentrate at an average price of $2,221/tone CIF2 for the period from 25 August 2021. Gross cash margin of 80%.
  • AKE achieved record revenue from Olaroz, up +341% to $293m on sales of 12,512 tons of lithium carbonate with average pricing increasing by 370% to $23,398/t FOB4. The gross profit margin was 82%.
  • EBITDAIX of $513.1m and consolidated NPAT of $337.2m (versus net loss of $89.5m in FY21). NPAT includes one off charges of $12.8m for Galaxy acquisition costs, an inventory uplift on purchase price allocation related to the merger of $12.4m, $13.4m related to amortization of customer contracts due to purchase price allocation, gains of $32.0m from financial instruments, and foreign exchange losses of $9.6m. Net finance costs were $13.8m.
  • Net assets increased to $3,081m as at FY22- end (vs $725m at FY21-end) including cash balances of $664m (vs $258m in FY21). The increase in net assets and cash of $2,356m and $406m was due to the Galaxy merger transaction.
  • Management highlighted strong cash generation and existing cash balance is expected to fully fund development projects. Total capex totalled $261.4m (vs $97.6m in FY21) and the Mizuho Stage 1 and Pre-export loan facilities were reduced by ~$33.7m.
  • Development Highlights. Olaroz Stage 2 reached over 91% completion and first production remains anticipated for late 2H CY22. Management stated, “successful completion of this project will deliver material new production from H2 FY23 onwards”.
  • Construction of the Naraha lithium hydroxide plant in Japan was completed, with first production expected in early 4Q CY22. Management expects that once product qualification is complete, this plant will provide AKE with exposure to the high value lithium hydroxide market. 
  • Construction at Sal de Vida began in January 2022, with first production expected by 2H CY23.
  • Feasibility Study and Maiden Ore Reserve for James Bay was released in December 2021. 

Company Description:

Allkem Ltd (AKE), was formed following the merger of ASX-listed lithium AKE operates as a specialty lithium chemicals company with lithium brine and borax operations in Argentina, a hard-rock lithium operation in Australia and a lithium hydroxide conversion facility in Japan. 

(Source: Banyantree)

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