Orocobre Shares Bounce Back Up Thanks to Lithium

Orocobre Shares Bounce Back Up Thanks to Lithium

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Financial vocabulary can seem daunting at first. Just learning what terms mean can be a headache for investors. Going long and short, buying puts and calls, dividend reinvesting and margins. This is just the tip of the iceberg.

Once you’ve learned enough technical terms to get by, there’s also the slang. One of my favourites is the ‘dead cat bounce’. It refers to a share’s upwards price movement after a decline. It’s a bit of a morbid visual, but it paints an accurate picture.

The reason for the price hike is because of speculators. They come in thinking they’re buying into a cheap stock.

A typical pattern you would see in almost every share price is an ebb and flow. This refers to the flow of overbuying and overselling. Buyers put upwards pressure on share prices, largely as a result of positive announcements. They could end up pushing too hard against sellers. Thus the stock is overbought.

You could probably guess what happens the next day. Sellers are more than happy to sell as they believe the stock is too high. They put downwards pressure on the stock and, more often than not, oversell the stock.

Now it’s the buyers’ turn again.

As you can see, this could go on forever, until buyers and sellers finally meet in the middle. This is a very simplistic view of share price action. But it’s exactly what’s happening to Orocobre Ltd [ASX:ORE], a small lithium producer/explorer.

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What Happened to the Orocobre Share Price?

ORE shares surged as high as 7.4% today, to $3.705 per share, after a momentary drop.

The stock wasn’t in a long-term downtrend, but it did bounce back from a 12.4% loss yesterday.

As shown in the graph below, shares soared up 23.51% on Monday, to a high of $3.94 per share. But as quick as returns came, they were taken away on Tuesday.

This morning, shares traded up again. Orocobre’s shareholder must feel like they’re on a roller-coaster right now. But as I explained above, it’s a common pattern for almost all stocks at some point or another.

orocobre-share-price

Source: Google Finance

Why did Orocobre trade up in the first place?

On 28 October, Orocobre released their quarterly report for the period ending 30 September 2016. Sales revenue of US$33.5 million was up 45% on quarter to quarter figures. September production totalled 3,013 tonnes, with a record monthly tonnage of 1,125 tonnes.

Production is expected to rise to 4,000 tonnes in December 2016. Better yet is the increasing price of lithium carbonate, as shown in the graph below.

lithium-carbonate-prices

Source: Orocobre

A positive announcement is one of the best ways to move a share price higher. But is it worth getting into Orocobre now that shares have already climbed?

It all depends on your views about electric vehicles (EV). The reason I say that is because lithium-ion batteries could be huge for the EV market.

What Happens now for Orocobre?

EV penetration rates aren’t high. They’re just above 1%. But growth has been extremely rapid. Registration of EVs was up 70% from 2014 to 2015. That’s over 550,000 vehicles sold worldwide in 2015.

And in August this year, EV sales totalled 91,300 in Europe alone. According to Visual Capitalist, lithium-ion will make up 70% of the total rechargeable battery market in 2025.

But there are assumptions attached to Orocobre’s shares climbing in the long-term.

They will be competitive within the global lithium market. The EV market has to continue to grow into the foreseeable future. Orocobre will also have to continue to increase production.

But if you are comfortable in these assumptions, Orovobre might be a stock worth looking at.

Härje Ronngard,

Junior Analyst, Money Morning

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