Monsters of Rock: Analysts continue to see the bright side of Allkem

Allkem (ASX:AKE) shares have come off 32% since hitting a 2023 high of $16.73 back in July.

Lithium prices have played a role, but plenty of uncertainty about its growth plans has also crept in, notably a major update on Monday which seemed to bury hundreds of millions in cost overruns largely on its Sal de Vida Stage 1 and 2 projects in Argentina amid a flurry of information on its long term production plans.

All up the company, which is in the process of attempting to merge with US brine producer Livent, aims to lift its output from 50,000tpa on a lithium carbonate equivalent basis in FY24 to 179,000t in FY28.

But it will cost much more to do so amid ongoing inflationary pressures.

Capex on the 25,000tpa Cauchari development in Argentina, planned to enter production in H2 2027, will rise 48% from US$446 million to US$659m, with opex up from US$3560/t LCE to US$4081/t LCE. However, higher prices would see operating margins remain around the 85% mark.

Capex at the James Bay spodumene project in Canada is up 33.8% on a December 2021 feasibility study to US$381.5m, while capex for the first stage of Sal de Vida where production is expected in H2 FY25 is up 38% from US$271m to US$374m and stage 2 capex is 25% higher, up from US$523m to US$657m.

This has all largely been blamed on inflation, with higher soda ash, lime, natural gas and labour costs to see opex at the 15,000tpa first stage of Sal de Vida rise from US$3612/t LCE to US$4529/t.

Number crunchers still on Allkem’s side

Yet a number of analysts remain on Allkem’s side.

Goldman Sachs’ Hugo Nicolaci, Paul Young and Elise Bailey have a buy rating on Allkem and $16.80 per share price target, well over 30% upside.

While that PT is down 2%, they say the brine and hard rock producer, which operates the Olaroz project in Argentina and Mt Cattlin mine in WA, is their preferred exposure among lithium stocks.

Goldman has a relatively bearish long term spodumene price of US$1000/t — current prices are a bit shy of US$3000t.

But Allkem’s valuation on GS’ calculators of US$885/t comes in well below its assessment of peers MinRes (ASX:MIN) (US$1700), Liontown (ASX:LTR) ($1630/t), Pilbara Minerals (ASX:PLS) ($1200), IGO (ASX:IGO) ($980) and Core Lithium (ASX:CXO) ($960).

Young et. al. say Allkem has “one of the best production outlooks in our lithium coverage, with broad based growth optionality” and 4x production growth over five years to FY28.

They say that would support a rebound in earnings to near record levels despite potentially falling lithium prices.

“Allkem has the largest lithium metal contained resource base amongst our coverage when factoring in South American brine assets and second largest reserve (excluding Olaroz due to ongoing reserve re-modeling),” they said.

“However, AKE’s aggregate resource is trading at a significant discount to peers, despite a competitive brine cost curve position and growing Canadian hard rock resource.”

Macquarie continues to see value in Allkem, putting its potential upside at over 100% in a recent note, while Morgans analyst Max Vickerson lifted the advisory firm’s rating to “add” and raised its price target after including the Cauchari project in its company valuation.