Lithium producer posts US$524m profit for FY23 but its outlook hinges on China

Allkem (ASX: AKE) on Tuesday reported US$524 million (A$817 million) in net profit after tax for FY2023, alongside strong revenue and production output. It was a positive result generated in a year where lithium prices peaked and then troughed massively, falling as much as 70% between November 2022 and May 2023.

AKE was also coming off a banner FY2022, in which the miner produced its first lithium, which drove its revenue to a 900% beat on the prior year – a figure that would never be topped in FY2023. But this year’s result sets a baseline for what investors can reasonably expect from AKE going forward, according to James Cooper of Fat Tail Investment Research.

“2023 saw nowhere near that level of growth but it was still solid and I think it’s a more accurate projection of how the company’s earnings will look from here, now that it’s reached fulltime production."

In the following Q&A, Cooper provides his commentary on the results and the broader environment, including the rising threat of a slowing Chinese economy and the supply-demand outlook.

• Net profit after tax: US$524.6 million
• Group EBITDA: US$909.8 million
• Total revenue: US$1.2 billion
• Production from Mt Cattlin, WA: 130,984 dry metric tonnes of spodumene
• Production from Olaroz, Argentina: 16,703 tonnes

Key company data for AKE

In one sentence, what was the key takeaway from this result?

Being a large-scale producer with two advanced operations, there were no big surprises, with the result meeting expectations. The company is in a solid position and is continuing to buck weakness in the lithium sector, with pretty solid output and revenue growth in FY23.

AKE's share price opened up 4% versus Tuesday's closing price. Is this an overreaction, under-reaction or appropriate, in your view?

AKE opened strongly this morning, which aligns with the company's earnings meeting the market's expectations, perhaps exceeding them a little. Lithium miners were up in US markets overnight so that’s likely giving the share price some tailwinds too.

Using the last few weeks of share price movement as a guide, with the valuation down around 16% or 17%, that’s mainly been driven by the fall in lithium prices from the peak of four or five weeks ago.

Ahead of today's open, the share price was also up a little over 4% yesterday, which suggests shareholders had strong expectations going into the earnings release.

Were there any major surprises in this result that you think investors should be aware of?

It was always going to be hard for the company to match last year’s outstanding revenue growth of 900% year-on-year. But that was because operations had just moved into full-time production.

2023 was nowhere near that level of growth but still solid and I think it’s a more accurate projection of how the company’s earnings will look from here.

The financial results all met expectations, with revenue of $1.2 billion around 1.5 times higher than last year's figure.

Gross profit of $1.1 billion was also a good year-on-year increase, as was net profit, which also came in around 150% higher than last year, but again, it’s not the huge level we saw last year.

The output from AKE’s primary deposit, the Mt Cattlin spodumene mine in Western Australia, was down on the prior year, which could cause a bit of anxiety in the market. Last year it produced 144,000 metric tonnes but was down to 130,000mt this year.

Investors should also note that lithium prices fell between 60-70% into May this year, from their record highs of November 2022. While it has been up and down pretty wildly, the average lithium price doubled through the reporting period overall. This helped drive that revenue as well, which helped mask some of the lower production output of AKE’s flagship project.

Would you buy, hold or sell AKE on the back of these results?

Rating: Hold

Based on the solid growth figures, AKE still represents pretty good value, trading on at an attractive forward PE multiple of 9.2 times for FY24 and 8.8 in FY25.

There’s also a dividend in the mix but you’re looking at a pretty low yield of around 0.5%.

The company has a good, solid pipeline of development projects, having announced a 173% resource upgrade on its James Bay hard rock lithium development in Canada. And management remains committed to exploration, which is a good sign of the company’s commitment to the long haul, from grassroots all the way through to late-stage development.

But I’d really want to see the lithium price consolidate before pulling the buy trigger, even though there are no major concerns operationally.

What’s your outlook on AKE and its sector over the year ahead? Are there any risks that investors should be aware of?

Operationally, I’d note the production drop at its flagship Mt Cattlin mine but the company remains on track for its production guidance across Australia and Argentina.

Another red flag is the rising cost of finance, which affects all producers and developers across the industry. With Allkem’s really strong pipeline of development projects, it will have challenges bringing those developments into production, given things such as:

• the cost of finance,
• labour shortages in Western Australia, and
• rising infrastructure costs.

Development is a capital-intensive process that requires a highly skilled labour force, which is one of the challenges for the company.

On the plus side, those challenges should stop any lithium oversupply from hitting the market any time soon, a scenario some people have projected will occur towards the end of this year. And the fact the company is already producing should also help, because they’re not getting this flood of new lithium supply coming to market.

Another positive for AKE is its geographical diversity across Australia, Argentina and Canada and its two different lithium deposit styles of lithium brine and hard rock spodumene. That gives it access to a broader range of battery supply markets.

And on the demand side, electric vehicle sales in the US hit a new record of 300,000 units in the second quarter of 2023. There’s also a big uptick in EV sales from China, with Li Auto having reported a 150% year-on-year sales increase.

From 1-5, where 1 is cheap and 5 is expensive, how much value are you seeing in the ASX resources sector right now? Are you excited or are you cautious, in general?

There’s been some heavy selling in the last couple of weeks, driven by deflation fears in China, so there are some very good value opportunities in the junior segment of the industry, among the smaller explorers and producers.

But among the big producers, we would have rated that a 5 (in terms of valuation expense) a couple of weeks ago, now down to a 4 with the selling we’ve seen.

It’s difficult to see some of the Quality producers getting much cheaper but that’s driven by China, whether it can push through some more stimulus. It really rests on China currently, from both an upside and downside perspective.

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