The Orocobre Limited (ASX: ORE) share price has continued its slide and dropped as much as 5.5% in early trade following the release of its half year results.
What happened in the first half?
For the six months ended December 31 Orocobre achieved revenue of US$51.5 million, earnings before interest, tax, depreciation and amortisation, impairment and foreign currency gains/losses (EBITDAIX) of $21 million, and a net profit of US$24 million.
However, the latter includes a tax benefit of US$15.2 million and a foreign exchange charge of US$7.9 million.
During the half the company produced a total of 6,075 tonnes of lithium carbonate and sold 5,163 tonnes for an average sales price of US$12,295 per tonne FOB.
The cost of sales during the half was US$4,251 per tonne, meaning Orocobre achieved a gross cash margin of US$8,044 per tonne. This was an improvement on the prior corresponding period when its margin stood at US$7,079 per tonne.
Unfortunately, this margin will certainly not be improving during the third quarter of FY 2019.
According to the release, the average sales price for the March quarter will be approximately US$9,000/tonne FOB. If its costs stay the same it will mean a margin of US$4,749 per tonne, down 41% on the average during the first half.
Another blow for shareholders is that the company won't be able to make up for these lower margins with increased production after recent rains at its operation in Argentina diluted its brine feedstock. As a result, production will now be flat on FY 2018's numbers.
Should you invest?
Orocobre finished the half with net cash of US$207.7 million, which is approximately a third of its market capitalisation. It's a similar story for rival Galaxy Resources Limited (ASX: GXY), which has a hefty cash balance.
Whilst this does make them attractive options for investors, I suspect that the shares of Orocobre, Galaxy, and Pilbara Minerals Ltd (ASX: PLS) will remain under pressure until lithium prices improve again.
In light of this, I would urge investors to sit this one out for now and focus on diversified miners such as BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO).
