Orocobre Confronts New Investment Challenges
Orocobre, one of the most accomplished resources sector companies in the current cycle, no longer depends on development outcomes and cyclical conditions for its investment returns. Sales will be the critical future measure of success. Unlike others in the sector, prices for its lithium and specialty chemicals products are being negotiated with customers individually rather than being subject to transparent industry-wide standards against which equity trades can be made. This means Orocobre needs to change how it reports its activities if it is to retain or improve on its current investor base. Its new investment challenge is to justify a $370 million market price. Here are the key numbers: 17,500 tpa of lithium product sales at a price of $5,000-7,000/t with costs of approximately $2,000/t. Two questions are posed. Can such fat margins persist in a commodity market with a queue of new entrants? Is a price of up to 7x prospective operating cash flows too expensive when Apple Inc is trading at less than 4x historical operating cash flows and capable of periodically reinventing itself to sustain its growth?
John Robertson is Chief Investment Strategist for PortfolioDirect a provider of resource sector investment stock ratings and portfolio strategies for mining and oil and gas investors. He has worked as a policy economist, corporate business...
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