Orocobre Sees Weak Lithium Market Improving in H2

Lithium producer Orocobre (TSX:ORL,ASX:ORE) thinks weakness in the market will remain in the short term, but expects a potential improvement in the second half of 2020.

After experiencing challenging conditions, the company has reduced operating costs at its Olaroz facility in Argentina — with output falling 5 percent to 3,586 metric tons in the quarter ended December 2019.

Revenues were also hurt during the period, down 16 percent, while cash costs for the quarter improved to US$4,109 per metric ton. The company’s average sales price received for the quarter was US$5,419 per metric ton — a decline of 49 percent year-on-year.

“We expect to see weak market conditions continuing for the first half of this year. There is potential for improved market balance in the second half,” Orocobre CEO Martin Perez de Solay said in an analyst call.

On the demand side, Orocobre said in a statement that during the quarter, the lithium sector remained challenged by slower Chinese electric vehicle (EV) market growth, a sluggish Chinese economy, the US-China trade war and lackluster energy storage system demand.

“While there was no demand catalyst to alleviate lithium price pressure, several positive demand signals emerged late in the December quarter/early (2020) relating to both the China and ex-China EV market,” it said, with Europe showing the most encouraging signs outside of the Asian country.

Orocobre is not the only lithium company taking steps to face this tough season in the space. Australia’s Pilbara Minerals (ASX:PLS,OTC Pink:PILBF) has moderated production from its Pilgangoora project since September due to continued weakness in the global lithium market.

Pilbara Minerals reported total output of 14,711 dry metric tons (dmt) of lithium concentrate in the December quarter, down from 47,859 dmt during the same period last year.

Commenting on the market, the company said that the fall in sales and slower-than-anticipated EV uptake have contributed to a softening in lithium chemical and spodumene concentrate pricing.

However, Pilbara expects stronger support for lithium raw material demand growth in the medium term. “(That’s because) of the sourcing initiatives currently underway by battery and car manufacturers, which will lead to increased demand for lithium-ion batteries globally,” it said.

Last week, Galaxy Resources (ASX:GXY,OTC Pink:GALXF) also released quarterly results, saying it will scale back output by about 60 percent at Mount Cattlin in the first quarter of 2020 due to current market conditions in the lithium space.

“The strategic drivers are to prioritize value over volume, generate positive free cash flow, preserve resource life and to maintain balance sheet capacity for advancement of the company’s development portfolio,” reads part of the press release.

Despite the underperformance of the lithium sector in 2019, the outlook for 2020 remains positive, and the mid-term through to 2025 continues to be robust.

Following Orocobre’s results, analysts at BMO Capital Markets maintained their “market perform” rating for the Brisbane-based company, but raised their target price to AU$3.

“(The) disappointing December quarter lithium pricing was pre-announced, with pricing for the March quarter now expected flattish … although production beat, battery grade mix remains low,” they said.

The analysts added that costs are a bright spot on operational improvement, and that the near-term lithium market outlook remains cautious, though the company expects market balance to improve in the second half of the year.

On Thursday (January 30), shares of Orocobre were trading down more than 6 percent in Toronto at C$2.77. However, the company is up more than 9 percent year-to-date.

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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.