AUSTRALIA ORE AU Price (at 5:11, 28 Feb 217 GMT) Neutral A$3.8 Valuation - DCF (WACC 1.%) A$ 1.34 12-month target A$ 3.17 12-month TSR % +2.9 Volatility Index High GICS sector Materials Market cap A$m 648 3-day avg turnover A$m 1. Number shares on issue m 21.5 Investment fundamentals Year end 3 Jun 216A 217E 218E 219E Revenue m 18.6 17.8 19.4 19.8 EBIT m -19.5 13.7 9.5 9.8 Reported profit m -22. 17.7 14.7 15.1 Adjusted profit m -19.4 17.9 14.7 15.1 Gross cashflow m -17.6 19.5 16.6 17.1 CFPS -1.9 9.2 7.8 8.1 CFPS growth % -164. nmf -15. 2.9 PGCFPS x nmf 25.7 3.3 29.4 PGCFPS rel x nmf 2.49 3.23 3.45 EPS adj -11.9 8.4 6.9 7.1 EPS adj growth % -135.7 nmf -17.9 3.2 PER adj x nmf 28.1 34.2 33.2 PER rel x nmf 1.59 2.27 2.54 Total DPS.... Total div yield %.... ROA % -9.5 6. 3.6 3.8 ROE % -1.9 8.9 7.6 8.3 EV/EBITDA x -69.3-55.8-45.5-44.7 Net debt/equity % -17.3-17.8-3.5-7.2 P/BV x 2.6 2.4 2.9 2.6 ORE AU vs Small Ordinaries, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, March 217 (all figures in USD unless noted, TP in AUD) Upside exposure fading Event ORE released their H1FY17 results. Management cut H2FY17 production forecast by ~4% and stated that costs would take longer to fall and production longer to hit nameplate. Impact Cutting H2FY17 and forward. Whilst H1 was broadly in line, ORE cut the production forecast for H2FY17 by ~4% to 5.5-6kt from 8.5-9kt (Macq: 7.8kt), and said that production would take longer to ramp up to nameplate. Management cited issues in their production and inventory models as the cause. As such, we see ORE s exposure to the lithium thematic reducing. Lower production means higher costs... With lower production forecast, ORE stated that costs would no longer fall as anticipated and they guided that costs should stay roughly at present levels until production lifts to higher levels. With our pushback of nameplate until FY19, this reduces earnings over the next several years. and potentially less cash for Phase 2. This domino effect continues, as with lower production and higher than previously forecast costs, ORE still assume they can fund Phase 2 predominately from operating cashflows and are forecasting ~US$23m cash at ORE corporate by end of FY18. As a result, we have delayed our forecast for Phase 2 by 12 months to avoid the JV going cashflow negative. Additionally, we assume further shareholder loans are necessary from ORE to SDJ to allow for the project to expand. Earnings and target price revision TP cut to A$3.17/sh from A$4.35/sh. EPS falls for FY17-2 by ~2-5cps. Forecasted production cut by 4% and costs higher by 3%, delay to Phase 2. Price catalyst 12-month price target: A$3.17 based on a DCF methodology. Catalyst: Update on projects or Q1 report Action and recommendation Maintain Neutral. ORE have ended H1FY17 with an extremely challenging scenario ahead, they will produce far less lithium than previously forecast and their costs will be substantially higher than expected. The knock-on effect means that despite a win on reducing the capex needed for Phase 2 (from US$19m to US$16m), they will likely have to delay the project. Outside of these factors we look to ORE s proposed Japanese hydroxide plant as a potential upside, as we do not attribute any value to it in our analysis but note that this could stem some of the reduced earnings we are now expecting. 1 March 217 Macquarie Securities (Australia) Limited Please refer to page 5 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
Fig 1 ORE share of Phase 1 and Phase 2 production Fig 2 Forecast costs & A$ lithium carbonate spot price 25, 2, 15, 1, 5, 5 45 4 35 3 25 2 15 1 5 12 1 8 6 4 2 Olaroz Phase 1 Olaroz Phase 2 Cost per tonne Spot carbonate price AISC cost per tonnes Olaroz FOB price Source: ORE, Macquarie Research, March 217 Source: ORE, Macquarie Research, March 217 Fig 3 Cumulative cash generation vs market cap Fig 4 Growth in cash pushed out 1 9 8 7 6 5 4 3 2 1-5 -1-15 -2-25 -3 % -1% -2% -3% -4% -5% -6% -7% Net Cash/(Debt) Market cap (A$M) Net Debt/(Cash) Gearing (net debt/equity) Source: ORE, Macquarie Research, March 217 Source: ORE, Macquarie Research, March 217 Fig 5 Operating and free cash flow Fig 6 Asset valuation breakdown 8 6 4 2-2 -4 Corporate -22% Debt -1% Cash 11% Olaroz 55% -6 Olaroz Phase2 29% Operating cash flow Free cash flow Source: ORE, Macquarie Research, March 217 Source: ORE, Macquarie Research, March 217 1 March 217 2
Fig 7 ORE summary model ASX: ORE Price: (A$ps) 4.44 Year end: Jun Rating: Neutral Outperform Up/dn TSR Mkt cap: (A$m) 93 Diluted shares (m) 29.5 Target: 3.17-29% -29% ASSUMPTIONS FY13 FY14 FY15 FY16e FY17e FY18e FY19e FY2e ATTRIBUTABLE MINE OUTPUT FY13 FY14 FY15 FY16e FY17e FY18e FY19e FY2e Exchange Rate A$/US$ 1.1.91.84.73.75.74.74.74 Lithium Production (ORE equity share) Lithium Carbonate US$/t 4784 52 4919 699 9773 785 715 6875 Olaroz Phase 1 t 82 4,487 7,827 8,775 1,4 1,4 Lithium Hydroxide US$/t 7348 726 7213 8395 11238 928 8223 796 Olaroz Phase 2 t 3,413 Borax US$/t 713 69 618 531 458 52 511 523 Lithium Hydroxide t RATIO ANALYSIS FY13 FY14 FY15 FY16e FY17e FY18e FY19e FY2e Total lithium sales t.. 82 4,487 7,827 8,775 1,4 13,813 Diluted share capital m 118 132 152 29 21 21 21 21 Unit Cash Cost US$/t n/a n/a 4,21 3,711 3,544 3,465 3,268 3,282 EPS (diluted and pre sig. items) A 76.5-4.5-5. -11.9 8.4 6.9 7.1 9. FOB Cash Cost US$/t n/a n/a 4,199 3,966 3,833 3,7 3,482 3,488 P/E x 5.8x -99.4x -88.3x -37.4x 52.7x 64.2x 62.2x 49.5x Notional Cash Margin US$/t na n/a 1,684 4,44 9,141 6,891 6,18 3,495 CFPS A (22.1) (5.2) (6.3) (1.1) 3.2 7.2 8.1 9.2 AISC cash cost US$/t na n/a 4,26 3,973 4,449 4,316 4,99 4,15 P/CF x -2.1x -84.9x -7.6x -421.7x 139.1x 61.6x 54.8x 48.x DPS A........ Dividend yield %.%.%.%.%.%.%.%.% OPERATIONAL OUTLOOK (ORE share) Franking Level % 1% 1% 1% 1% 1% 1% 1% 1% Book value per share x 1.56 1.14.83.73 1..83.9.99 P/Book value x 2.8x 3.9x 5.4x 6.1x 4.5x 5.4x 4.9x 4.5x R.O.E. (pre sig items) % 5% -4% -6% -13% 9% 8% 8% 9% R.O.A. (pre sig items) % -5% -3% -5% -5% -4% -4% -5% -5% Interest Cover x 113.4x 49.9x -7.4x -18.x 4.7x 5.6x 5.5x 21.6x EBITDA per share A$ps -.9 -.3 -.4 -.3 -.4 -.5 -.5 -.5 EV/EBITDA x -85.7x -24.9x -154.x ##### -12.8x -82.9x -85.x -82.4x P&L FY13 FY14 FY15 FY16e FY17e FY18e FY19e FY2e Sales Revenue A$m 19 26 21 19 18 19 2 2 Other Revenue A$m Total Revenue A$m 19 26 21 19 18 19 2 2 Operating Costs A$m (19) (18) (16) (11) (15) (17) (18) (18) Operational EBITDA A$m 7 5 8 3 2 2 2 Exploration Expense/Write-offs A$m () () () () () Corporate & Other Costs A$m (11) (12) (11) (15) (12) (12) (13) (13) RESERVES AND RESOURCES (ATTRIBUTABLE) EBITDA A$m (11) (4) (6) (7) (9) (11) (11) (11) Lithium Resources Measured Indicated Inferred Total D&A A$m (1) (1) (1) (2) (1) (2) (2) (2) Project Mt Mt Mt Mt EBIT A$m (11) (6) (7) (9) (1) (12) (12) (13) Olaroz 1.44 5.. 6.4 Net finance expense A$m (1) () 2 2 2 1 Cauchari...47.5 SDJ JV profit/loss A$m 12 () () (11) 24 22 22 28 Salinas Grandes...24.2 Profit Before Tax A$m 9 (6) (9) (2) 16 12 12 15 Total 1.4 5..7 7.2 Tax Expense (excl abn'ls) A$m 1 () 1 1 2 3 3 4 Mt 25, Minorities A$m () Borax Resources Measured Indicated Inferred Total Adjusted NPAT A$m 92 (6) (8) (19) 18 15 15 19 Project Mt Mt Mt Mt Significant Items (post tax) A$m 4 () 9 (3) () Borax Argentina. 6.9 13.8 2.7 Reported NPAT A$m 95 (6) 1 (22) 18 15 15 19 Total. 6.9 13.8 2.7 2, 15, 1, 5, Olaroz Phase 1 Olaroz Phase 2 FY13 FY14 FY15 FY16e FY17e FY18e FY19e FY2e FY21e FY22e FY23e FY24e FY25e CASHFLOW FY13 FY14 FY15 FY16e FY17e FY18e FY19e FY2e Net Profit A$m 92 (6) (8) (19) 18 15 15 19 EQUITY DCF VALUATION Interest/Tax/D&A A$m (7) 3 2 5 1 1 2 1 Projects A$m A$ps Working Capital/other A$m (111) (4) (4) 12 (12) () (1) Olaroz 254 1.21 Net Operating Cashflow A$m (26) (7) (1) (2) 7 15 17 19 Olaroz Phase 2 51.24 PP&E A$m (2) (7) (3) (5) (3) (2) (2) (2) Borax (1) (.) Investments A$m (2) (3) () Undeveloped Resources 29.14 Sale of PPE and Other A$m 8 2 1 (6) () 3 (54) (1) Corporate (11) (.48) Free cash flow A$m (2) (12) (14) (17) 4 16 (39) 7 Unpaid Capital 2.1 Dividends Paid A$m Cash 52.25 Debt A$m (1) (3) (43) (36) () Debt (4) (.2) Equity Issuance A$m 24 28 38 82 1 Net equity value at 1% WACC 283 1.34 Other A$m Target price (1x NPV @ spot $9,/t LCE) 3.17 Net Financing Cashflow A$m 14 26 (5) 46 Net change in cash A$m (6) 14 (19) 29 4 16 (39) 7 BALANCE SHEET FY13 FY14 FY15 FY16e FY17e FY18e FY19e FY2e Cash A$m 11 25 7 36 39 55 16 23 PP&E & Mine Development A$m 9 13 13 15 15 16 16 17 Exploration A$m 14 9 9 6 6 6 6 6 Total Assets A$m 214 177 156 179 245 275 24 252 Debt A$m 4 4 3 3 2 2 2 2 Total Liabilities A$m 3 26 31 26 36 11 51 44 Total Net Assets / Equity A$m 184 151 126 153 29 174 189 28 Net Debt / (Cash) A$m (7) (21) (4) (33) (37) (53) (14) (21) Gearing (net debt/(nd + equity)) % (4%) (16%) (3%) (28%) (22%) (44%) (8%) (11%) Gearing (net debt/equity) % (4%) (14%) (3%) (22%) (18%) (3%) (7%) (1%) Source: ORE, Macquarie Research, March 217 1 March 217 3
Macquarie Quant View The quant model currently holds a reasonably negative view on. The strongest style exposure is Growth, indicating this stock has good historic and/or forecast growth. Growth metrics focus on both top and bottom line items. The weakest style exposure is Valuations, indicating this stock is over-priced in the market relative to its peers. 1256/1543 Global rank in Materials % of BUY recommendations 67% (4/6) Number of Price Target downgrades 4 Number of Price Target upgrades Fundamentals Attractive Quant Local market rank Global sector rank Displays where the company s ranked based on the fundamental consensus Price Target and Macquarie s Quantitative Alpha model. Two rankings: Local market (Australia & NZ) and Global sector (Materials) Macquarie Alpha Model ranking A list of comparable companies and their Macquarie Alpha model score (higher is better). Factors driving the Alpha Model For the comparable firms this chart shows the key underlying styles and their contribution to the current overall Alpha score. 1.9 1.4.6.3.2 -.7 -.8-3. -2. -1.. 1. 2. 3. -1% -8% -6% -4% -2% % 2% 4% 6% 8% 1% Valuations Growth Profitability Earnings Momentum Price Momentum Quality Macquarie Earnings Sentiment Indicator The Macquarie Sentiment Indicator is an enhanced earnings revisions signal that favours analysts who have more timely and higher conviction revisions. Current score shown below. Drivers of Stock Return Breakdown of 1 year total return (local currency) into returns from dividends, changes in forward earnings estimates and the resulting change in earnings multiple. -.5. -.4 -.7.7 -.4-1. -3. -2. -1.. 1. 2. 3. -1% -5% % 5% 1% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return What drove this Company in the last 5 years Which factor score has had the greatest correlation with the company s returns over the last 5 years. Price to Sales LTM Price to Book FY1 Price to Book LTM Price to Book NTM Price to Cash FY Price to Earnings LTM 3m Earnings Revisions Price to Earnings NTM -25% Negatives Positives -2% -2% -21% -3% -2% -1% % 1% 2% 3% 21% 2% 19% 26% How it looks on the Alpha model A more granular view of the underlying style scores that drive the alpha (higher is better) and the percentile rank relative to the sector and market. Alpha Model Score Valuation Growth Profitability Earnings Momentum Price Momentum Quality Capital & Funding Liquidity Risk Technicals & Trading Normalized Score -.7 -.86.57 -.6 -.4.3 -.6-1.63 -.92 -.27.5 Percentile relative to sector(/1543) Percentile relative to market(/422) 5 1 5 1 1 1 Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group (cpg@macquarie.com) 1 March 217 4
Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+1% Neutral expected return from -1% to +1% Underperform expected return <-1% Macquarie South Africa Outperform expected return >+1% Neutral expected return from -1% to +1% Underperform expected return <-1% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3 index return Neutral (Hold) return within 5% of Russell 3 index return Underperform (Sell) return >5% below Russell 3 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down 6 1% in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 4 6% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 3 4% in a year. Low medium stock should be expected to move up or down at least 25 3% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 31 December 216 AU/NZ Asia RSA USA CA EUR Outperform 57.53% 5.72% 45.57% 42.28% 6.58% 52.79% (for global coverage by Macquarie, 8.71% of stocks followed are investment banking clients) Neutral 33.9% 33.97% 43.4% 5.11% 37.23% 35.62% (for global coverage by Macquarie, 8.5% of stocks followed are investment banking clients) Underperform 8.56% 15.3% 11.39% 7.61% 2.19% 11.59% (for global coverage by Macquarie, 4.63% of stocks followed are investment banking clients) ORE AU vs Small Ordinaries, & rec history (all figures in AUD currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, March 217 12-month target price methodology ORE AU: A$3.17 based on a DCF methodology Company-specific disclosures: ORE AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Ltd's equity securities. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures. Date Stock Code (BBG code) Recommendation Target Price 31-Jan-217 ORE AU Neutral A$4.35 2-Dec-216 ORE AU Outperform A$4.6 29-Oct-216 ORE AU Outperform A$4.2 6-Oct-216 ORE AU Outperform A$4.3 31-May-216 ORE AU Outperform A$5. Target price risk disclosures: ORE AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group s Investment Banking activities. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited ABN 58 2 832 126, AFSL 238947, a Participant of the ASX and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Wealth Management, a division of Macquarie Equities Limited ABN 41 2 574 923 AFSL 23754 ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 8 583 542, 1 March 217 5
This publication was disseminated on 28 February 217 at 15:44 UTC. Macquarie Wealth Management AFSL No. 23752) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. Apart from Macquarie Bank Limited ABN 46 8 583 542 (MBL), any MGL subsidiary noted in this research,, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research contains general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures Macquarie Group 1 March 217 6