Australia | Oct 22 2018
September quarter lithium production from Galaxy Resources disappointed brokers. However, several potentially positive catalysts lie ahead for 2019.
-Substantial opportunity if the Mt Cattlin yield optimisation is successful
-A partnership on Sal de Vida could leave the company with surplus cash
-Genuine greenfield options considered substantially attractive
By Eva Brocklehurst
Establishing 2019 spodumene pricing, commissioning the Mount Cattlin yield optimisation project and engaging in a strategic partnership at Sal de Vida are key to the near term outlook for Galaxy Resources ((GXY)).
Production of spodumene concentrate of 31,156dmt and sales of 29,555dmt in the September quarter were below forecasts and operating margins fell to US$411/t, on the back of lower grade, recovery and productivity. A delay in the necessary approvals for mining east of Floater Road at Mount Cattlin meant access was restricted to lower-grade, weathered ore at the SW2 pit.
Credit Suisse points out permits were expected in three months but took five and there was limited allowance in the mine schedule for the delay. As a result of reduced production, UBS estimates costs lifted 25% quarter on quarter, lowering cash margins, yet a turnaround is expected in the December quarter. UBS forecasts grades to rise to 1.05% in the December quarter and to 1.15% in the first half of 2019.
Canaccord Genuity reduces 2018 production forecasts as a result of the disappointing September quarter and lowers 2018 earnings estimates, partially offset by lower USD/AUD assumptions. Still, the broker, not one of the eight stockbrokers monitored daily on the FNArena database, considers the disappointment temporary and retains a Buy rating with a $4.75 target.
Bailieu Holst observes all lithium-related stocks suffered from a fall in spot prices in China, and the outcome of 2019 contract negotiations is going to be crucial for the Galaxy Resources share price. The broker, also not one of the eight, believes only time will tell how this pans out.
For those willing to accept the volatility, the stock is the broker's preferred play on lithium because of its cash position and ability to progress development without the need for additional equity. Bailieu Holst retains a Buy rating and $5.05 target.
Yield Optimisation
The company has also reported the yield optimisation project at Mount Cattlin will now be completed in the December quarter. The timing has been slowed down by fabrication and equipment delays. UBS anticipates an improvement in recoveries from the March quarter, increasing to 52%, and then 60% and 70% over the subsequent quarters, respectively. An updated resource and reserve estimate is due early in the March quarter.
The delay to the yield optimisation is immaterial in the context of successfully executing on the project, Credit Suisse asserts, and there is a substantial opportunity if the company is successful.
Sal de Vida
Galaxy Resources expects the sale of the northern Sal de Vida tenements to POSCO to be finalised during October, delivering a net US$257m in cash. Combined with cash flow from Mount Cattlin over the coming years, Canaccord Genuity estimates Galaxy Resources can fully fund the development of Sal de Vida.
Still, a transaction regarding a strategic partnership is mooted by the end of the year. The broker believes this would then leave the company with a significant cash surplus over and above medium and longer term requirements.
Citi agrees there is a potential for capital management in order to return some of this excess cash, particularly given the pressure on the share price, while UBS believes a sell down of Sal de Vida will underpin negotiations regarding offtake.
Management has also noted Sal de Vida will take around 2.5-3 years to develop. The project is currently expected to start mid 2019, with first production forecast for early 2022. Yet, pushing back the development of Sal de Vida by around 1.5 years means Macquarie's 2021 and 2022 estimates for earnings per share fall -86% and -52%, respectively.
The objective in seeking a development partner is to fully fund Sal de Vida through to production and, in lieu of any partner, Macquarie assumes Sal de Vida will be developed solely by Galaxy Resources with funding provided by debt facilities.
Meanwhile, the company intends to lodge the environmental impact statement for the James Bay project in early November and has completed preliminary metallurgical test work for the proposed downstream conversion facility.
Credit Suisse remains cautious until the uplift in recoveries at Mount Cattlin can be demonstrated and there is greater clarity around Sal de Vida funding, acknowledging one of the most attractive aspects of the stock as an investment proposition is its genuine greenfield development options.
Credit Suisse envisages greater value to be forthcoming in this regard, as opposed to the core Mount Cattlin operation, but remains cautious about the economics of Sal de Vida, well aware of challenges in brine development & operations versus hard rock mining & processing.
The broker also does not share the company's confidence that the recently introduced export tax in Argentina will be repealed ahead of the commissioning of Sal de Vida. Hence, the events required to gain conviction on the value enhancement opportunity appear to be some time away.
FNArena's database shows three Buy ratings and two Hold. The consensus target is $3.41, suggesting 59.6% upside to the last share price.
See also, Galaxy Weighing Up Partnership Options on Sept 4, 2018.
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