Is Orocobre Producing Now At 80% Of Design Capacity? What Does That Mean?

| About: Orocobre Ltd. (OROCF)

Summary

A recent interview of Orocobre’s CEO with Morgans Financial where he sustains that Orocobre is now producing at 80% of design capacity prompts this commentary.

These words have generated some confusion because, based on earlier production data, there appears to be no way of showing that Orocobre is producing at that capacity.

So perhaps he was thinking of this number as a percentage of each quarter’s target, assuming the sum of production targets in 2016 equals design production capacity.

This would imply a production target for Q4 too difficult to achieve, suggesting that Orocobre could be considering that capacity of production as an option for 2016 as a whole.

These suppositions will only be clarified once Orocobre reveals how much lithium carbonate it finally produced in the last quarter and how much it plans to produce in Q4 2016.

In a recent interview with consultant Chris Brown from Morgans Financial, Richard Seville, Orocobre's (OTCPK:OROCF) CEO, indicated that the company is now producing at 80% of design capacity. In the following text, you can see the corresponding transcription (from minute 1:26 to minute 2:05):

- Richard Seville, Orocobre CEO: ... and we're running now at about 80% to design capacity.

- Chris Brown, Morgans Financial Consultant: And design capacity is how much and what are you producing?

- Richard Seville, Orocobre CEO: Seventeen and a half thousand tons per annum is the design capacity. We're producing a high quality product or few different products actually. This is lithium carbonate, battery-grade lithium carbonate and the sales prices we're getting at the moment are plus ten thousand dollars a ton. That's what we're expecting for this coming quarter FOB basis for the project in Argentina.

- Chris Brown, Morgans Financial Consultant: And you say you are about at 80% of production capacity?

- Richard Seville, Orocobre CEO: Yup.

I have at least two problems with this information. First, in my latest piece I argued that "Orocobre has only managed to produce 4,058 tons in its first year of operation (from April 2015 to March 2016)." Since design capacity is 17,500 tons of Li2CO3 per annum, and considering a 12-month period, this implies that by Q1 2016, Orocobre was running at 23.19% of production capacity. Second, according to Orocobre's presentation at the 8th Lithium Supply & Markets in Las Vegas in May, the target for Q2 2016 was 3,000 tons. So even assuming the company has hit that milestone, we would have 39.61% for a 12-month period (from July 2015 to June 2016) and 30.47% year-to-date.

Hence there would be no way to demonstrate that Orocobre is running now at 80% of production capacity. But perhaps Richard Seville was thinking of something else. How about if that number came out of calculating the percentage of actual production with respect to each quarter's target, assuming that the sum of the four targets for 2016 equals 17,500 tons?

If this reasoning is correct, then 80% of production capacity now would mean either: (1) Producing at 80% of the target in Q2 2016 (i.e. the last quarter) or (2) producing (on average) 80% with respect to corresponding targets of the two first quarters of the year. In the latter case, we would have to conclude that production in Q2 2016 was only at 62.84% of its target, considering that actual production in Q1 2016 was 97.17% of the target.

In Table 1 we can see that our previous reasoning would imply a production target of 8,500 tons for Q4 2016, with an increment of 4,900 tons and a percent variation of 136 with respect to the previous quarter.

Table 1

Orocobre: Lithium Carbonate Production Targets

2016

Sources:

* Orocobre Olaroz_Operations Update

** Orocobre Company_Presentation LasVegas

*** Morgans Financial Interview (from minute 2:12 to minute 2:16)

*v Estimated by subtracting 17,500 minus sum of production targets for Q1-Q3 2016.

Putting all of this in perspective, one needs to wonder here whether this target is feasible, and for that we may have to direct our attention to the company's performance in the recent past. As shown in Table 2, it looks like Orocobre has been able to handle very well increments up to 1,224 tons as well as significant percent variations from one quarter to the next. But it doesn't necessarily follow that it could increase - without any problem - production by 4,900 tons from Q3 2016 to Q4 2016.

Table 2

Orocobre: Lithium Carbonate Production

2015-2016

Source: Orocobre Olaroz_Operations Update.

This would lead us back to Orocobre's CEO statement that they are operating today at 80% of production capacity. In this connection, we could argue that Mr. Seville is perhaps thinking of producing at about 80% capacity all the way through 2016, in which case we would end up with the two options mentioned above. This is depicted in Tables 3 and 4.

Table 3

Orocobre: Production Targets and Actual and Estimated Production

2016

Option (1)

Sources: Tables 1 and 2.

* Number for Q1 2016 corresponds to actual production. Figures for the other quarters are estimates on basis of production capacity.

Table 4

Orocobre: Production Targets and Actual and Estimated Production

2016

Option (2)

Sources: Tables 1 and 2.

* Number for Q1 2016 corresponds to actual production. Figures for the other quarters are estimates on basis of production capacity.

If our presumptions turn out to be right, the bottom line would then be that Orocobre finishes 2016 producing around 14,000 tons in lieu of 17,500 tons. And this would lead me to qualify somewhat my previous contention that "it all indicates that its steady growth will continue throughout 2016 to reach near full capacity by the end of the year." But of course these suppositions will only be clarified once Orocobre reveals just how much lithium carbonate it finally managed to produce last quarter and how much it plans to produce in Q4 2016.

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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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