Allkem — Moving up the value chain

Allkem (ASX: AKE)

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AUD9.83

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Research: Metals & Mining

Allkem — Moving up the value chain

Allkem is uniquely positioned to be one of the main beneficiaries of the favourable lithium market conditions as it boasts a healthy pipeline of advanced development projects, aiming to triple its production capacity and to expand into the higher value battery-grade products. Despite near-term economic weakness, lithium demand continues to be driven by the secular trend towards decarbonisation and growing global electric vehicle (EV) adoption. Supported by supply shortages, cost inflation and project delays, lithium prices should remain at elevated levels to incentivise new supply. Despite adding c 45% year to date, Allkem shares trade at a FY23e consensus EV/EBITDA multiple of only 5.6x versus the downstream peers’ average of 9.6x.

Written by

Andrey Litvin

Energy and Resources Analyst

Metals & Mining

Allkem

Moving up the value chain

Metals and mining

QuickView

1 November 2022

Price

A$15.0

Market cap

A$9.6bn

US$:A$1.56

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Share details

Code

AKE

Listing

ASX

Shares in issue

637.7m

Business description

Created as part of a merger between Orocobre and Galaxy Resources in 2021, Allkem is a speciality lithium chemicals company headquartered in Argentina. It currently operates the Olaroz lithium brines project in Argentina (66.5%; c 15ktpa carbonate) and the hard rock Mt Cattlin mine in Australia (c 25ktpa lithium carbonate equivalent in concentrate). Allkem’s development pipeline includes Olaroz Stage 2 (25ktpa carbonate; due in FY23e), Sal de Vida Stage 1 (15ktpa carbonate; FY23/24e) and the Naraha conversion facility (10ktpa hydroxide; FY23e). It is also advancing its feasibility stage James Bay hard rock lithium project in Canada.

Bull

Attractive long-term lithium market fundamentals.

Robust development pipeline and growth profile.

Strong cash flow generation and balance sheet (Q123 net cash of US$447m, excluding leases).

Bear

Near-term economic weakness and uncertainty.

Relatively high execution risk due to multiple development projects.

Significant exposure to Argentina.

Analyst

Andrey Litvin

+44 (0)20 3077 5755

Allkem is uniquely positioned to be one of the main beneficiaries of the favourable lithium market conditions as it boasts a healthy pipeline of advanced development projects, aiming to triple its production capacity and to expand into the higher value battery-grade products. Despite near-term economic weakness, lithium demand continues to be driven by the secular trend towards decarbonisation and growing global electric vehicle (EV) adoption. Supported by supply shortages, cost inflation and project delays, lithium prices should remain at elevated levels to incentivise new supply. Despite adding c 45% year to date, Allkem shares trade at a FY23e consensus EV/EBITDA multiple of only 5.6x versus the downstream peers’ average of 9.6x.

FY22 defies economic and equity markets gloom

Allkem enjoyed a stellar performance in FY22 (to June 2022) as its two producing operations, Olaroz and Mt Cattlin, benefitted from robust production results and record lithium prices. As a result, the company’s revenue grew 9x to US$770m and EBITDA jumped 171x to US$513m, an impressive margin of 67% that was also assisted by stringent cost control. With lithium prices hovering near record levels (c US$75/kg China carbonate spot), and the company guiding to a Q223 contract carbonate price of US$50/kg (vs US$23.4/kg in FY22 and US$43.2/kg in Q1), Allkem remains firmly on a growth path. Consensus expectations currently point to a near doubling of FY23e EBITDA to US$1,056m.

Lithium production capacity to triple by 2026

Despite the current economic headwinds, the longer-term EV and lithium industry fundamentals remain intact, underpinned by ambitious global climate and decarbonisation targets. Thanks to its robust pipeline of advanced development projects, Allkem emerges as one of the main beneficiaries of the favourable market conditions as it aims to triple its production capacity by 2026. Importantly, the company continues to move up the value chain as its Naraha hydroxide facility is being commissioned and the battery-grade lithium Sal de Vida project is under construction. Allkem has a strong balance sheet with Q123 cash of US$664m.

Growing downstream exposure warrants premium

Trading at a consensus FY23e EV/EBITDA of only 5.6x, Allkem is valued at a multiple that is more appropriate for an upstream lithium producer (c 5x) rather than a diversified business with growing exposure to battery-grade downstream operations (c 10x). While execution and country risks could weigh on the stock, as Allkem continues to move up the value chain, we believe its valuation gap to the industry leaders such as Albemarle (Y1 EV/EBITDA of 10.3x) should start to close.

Historical financials and consensus estimates

Year
end

Revenue
(US$m)

EBITDA (US$m)

PBT
(US$m)

EPS
(US$)

EV/EBITDA
(x)

P/E
(x)

06/22

770

513

430

0.52

8.9

13.9

06/23e

1,477

1,056

1,022

1.01

5.6

9.5

06/24e

1,932

1,192

1,212

1.18

5.0

8.1

Source: Allkem, Refinitiv

EDISON QUICKVIEWS ARE NORMALLY ONE-OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been prepared and issued by Edison. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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