Company Overview: Galaxy Resources Limited is an Australia-based company engaged in mineral exploration and processing. The Company's principal activities include the production of Lithium Carbonate and exploration for minerals. Its segments include Australian operation, Argentina operation and Canada operation. The Australia operation segment includes the development and operation of the Mt Cattlin spodumene mine and exploration for minerals. The Argentina operation segment includes the development of the Sal de Vida project and exploration for minerals. The Canada operation segment includes the development of the James Bay project and exploration for minerals. The Mt Cattlin spodumene project is located over two kilometers north of the town of Ravensthorpe in Western Australia. The Sal de Vida Project is located in north-west Argentina. Its James Bay project is located in northwest Quebec, over two kilometers south of the Eastmain River and approximately 100 kilometers east of James Bay.


GXY Details

Sal de Vida project to add production capacity for GXY: Galaxy Resources Limited (ASX: GXY) is into the production of Lithium Concentrate and exploration for minerals in Australia, Canada, and Argentina. It wholly owns and operates the Mt Cattlin mine in Ravensthorpe Western Australia, which is currently producing spodumene and tantalum concentrate.

It plans to develop the Sal de Vida lithium and potash brine project in Argentina situated in the lithium triangle (where Chile, Argentina, and Bolivia meet), which is currently the source of more than 40% of global lithium production. Sal de Vida has excellent potential as a low-cost brine-based lithium carbonate production facility. Galaxy’s diversified project portfolio also comprises wholly owned James Bay lithium pegmatite project in Quebec, Canada. James Bay will provide additional expansion capacity to capitalize on future lithium demand growth. Moreover, the company posted a bottom-line growth at CAGR of 53.5 per cent over FY15-18. Similarly, GXY is generating better returns for its shareholders than its peers as the company reported ROE of 30.1% in FY18 as compared to the industry median of 12.2%. It has a favourable capital structure with nil debt and cash balance of US$285.3 Mn as on 31 March 2019.

Galaxy Resources would ramp-up its production in the upcoming period on the support of decent production growth at Mt Cattlin, development plans at Sal de Vida project which has a decent potential for low-cost brine-based lithium carbonate, and future prospect from its James Bay lithium pegmatite project. Moreover, Lithium demand is expected to supersede the supply leading to price rise, and this is expected to improve the company’s margins.


 Key Valuation Metrics (Source: Thomson Reuters)

Li Demand Expected To Rise In China: High Lithium demand in China and other emerging markets are expected to drive growth for the lithium explorers, producers, and developers. It can be supported by the fact that Lithium-ion batteries are used today in almost every electronic devices ranging from laptops, notebooks, cell phones, power tools, etc. and with the proliferation of electric vehicles (EV) as an alternative to hydrocarbon fuel driven vehicles, demand for Lithium will rise in the coming times. It is expected that annual global EV sales are forecasted to hit 24.4 Mn by the year 2030. New government policies to curb pollution where incentivising EV manufacturing companies and increasing duties on traditional vehicles, is expected to give a high boost to Lithium’s demand.

Headwinds which affected Li supply chain: Prevailing market sentiment over global growth concerns especially trade war between the US and China, and current weakness in short term contract prices for lithium chemicals placed some pressure over lithium’s global demand. These headwinds are short-term in nature and are expected to pass following the recovery in the electronics and automobile markets.

Following the destocking cycle in the manufacturing and industrials sector as a whole from the second half of 2018, the overall macro sentiment in China remains poor in the wake of the continued US-China trade tensions and as a result, the ongoing tightness of credit and financial liquidity in general. This has noticeably impacted the lithium battery supply chain, with continued softness in pricing coupled with materials and battery producers maintaining very low to zero inventory levels, due to the limited financial liquidity being made available to manufacturers. Despite these macro conditions, the end user segment of the lithium battery chain has exhibited continued demand growth. The Chinese new energy vehicle (“NEV”) sector started the year strongly, demonstrating substantial growth amongst the backdrop of a weak domestic auto market.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table which together form around 24.25% of the total shareholding. Ausbil Investment Management Limited and The Vanguard Group, Inc. hold maximum interest in the company at 8.99% and 2.45%, respectively.


Top 10 Shareholders (Source: Thomson Reuters)

Largest Shareholding Stake In Alliance:The company recently informed the market that Alliance Mineral Assets Limited (ASX: A40) has entered into separate subscription agreements to raise total gross proceeds of A$32.5 million at a price of A$0.20 per placement share (Offer Price) with Galaxy Resources ($22.5 million) as  institutional placement, and with Weier Antriebe und Energietechnik GmBH, a wholly-owned subsidiary of Jiangxi Special Electric Motor Co., Ltd (Jiangte) ($10 million) as conditional placement. The placement proceeds would be utilized for capital expenditure for continued upgrades to the processing facilities at the Bald Hill Lithium and Tantalum Mine in Western Australia (Bald Hill Mine), future exploration and other initiatives at the Bald Hill Mine, and for general working capital requirements.

Following the placement completion, GXY would become the largest individual shareholder in Alliance. The Bald Hill Mine produces high quality spodumene concentrates and believes that the tenements surrounding the existing Bald Hill Mine operations hold substantial value potential which is expected to get unlocked in ongoing explorations.

In its recent production update at Mt Cattlin Project in Ravensthorpe, WA, Galaxy Resources highlighted about record production volume of 21,901 dry metric tonnes (dmt) of Lithium Concentrate for April 2019, representing a strong operational execution and ramp up of performance following the completion of the Yield Optimization Circuits in Q1 2019.

GXY’s customer base in China is linked to some of the top-tier lithium supply chain end-users, highlighting the broad acceptance and recognition of consistency of the Mt Cattlin product. In addition, the continued reduction in unit production costs allows Galaxy to deliver a healthy operational cash margin, notwithstanding the recent softening of lithium feedstock and chemical pricing.

Operational Highlights for Quarter Ended March’19 : Galaxy had US$285.3 million in cash and liquid assets on March 31, 2019 and zero debt. Total mining volumes at Mt Cattlin increased by 18% as compared to the previous quarter due to an increase in the stripping ratio. Production volume was reported at 41,874 dmt which was 24% higher than the previous quarter resulting from an increased grade of ore processed (rising from 1.07% to 1.15% quarter-on-quarter), a 3% increase in ore volume treated and improved recovery of 51% (versus 47% reported in Q4 2018).

Production & Sales Statistics (Source: Company Reports)

For Sal De Vida project, the Company has strategic and financial flexibility and will continue to progress the development of Sal de Vida to ensure that its true value is unlocked and enhanced. Due to prevailing market sentiment and current weakness in short term contract prices for lithium chemicals, the Company believes that it is prudent to remain patient regarding any third-party transaction for the Sal de Vida Project, since it remains highly confident in the underlying fundamentals of the lithium sector and market growth potential, as well as the world class quality of the underlying asset.

During the quarter, the James Bay project team continued interactions with key stakeholders and authorities, which included providing clarifications regarding the Environmental and Social Impact Assessment (“ESIA”) submitted during Q4 2018. In March, the Canadian Environmental Assessment Agency (“CEAA”) confirmed that the Environmental and Social Impact Assessment (“ESIA”) for the James Bay Project is consistent with the EIS Guidelines resulting in the file moving to the next step of evaluation which could mean that there is a final recommendation as quickly as within 12 months.

FY18 Production & Financial Highlights: Galaxy Resources reported cash of US$24.8 Mn with zero debt as on December 31, 2018. It raised around US$280 Mn capital by the divestment of the tenement in northern Salar del Hombre Muerto. As per production updates, close to 156,689 dmt of Lithium Concentrate were produced, and 159,255 dmt of Lithium Concentrate (with average product grade of 5.76% Li₂O) were sold. Reserves at Mt Cattlin increased to 10.7 mt (with product grade of 1.15% Li₂O), and resources at Mt Cattlin were reported at 16.7 mt (with product grade of 1.28% Li₂O).


Key Metrics (Source: Company Reports)

Decent Top-line & Bottom-line performance: It reported an increase in revenue by 60% to US$153.9 million. Its net profit after tax for FY18 was reported at US$150.2 million from US$0.127 million in FY17. Its EBITDA excluding POSCO transaction increased by 90% to US$58.1 million. Its net cash decreased from US$39,662,000 in FY17 to US$(20,025) in FY18.


Key Metrics for FY 2018 (Source: Company Reports)

Key Ratios: Its EBITDA margin and net margin for FY18 stand at 35.3% and 97.6% which are better than the industry median of 29.5% and 14.0% respectively, indicating decent fundamentals of the company. Its ROE for FY18 stands at 30.1% which is better than the industry median of 12.2%, implying better return for its equity-holders than its peer group. Its current ratio for FY18 stands at 2.96x, which is better than the industry median of 1.67x, showing better liquidity position to address its short-term obligations than its peer group.


Key Ratios (Source: Thomson Reuters)

What to Expect from GXY: As per the release, in Mt Cattlin, the lithium concentrate production guidance for Q2 FY19 has been re-affirmed at 45,000 dmt to 50,000 dmt, whereas for full calendar year 2019, the production guidance is estimated to be in the range of 180,000 dmt to 210,000 dmt. The shipment volume and sales of 45,000 dmt to 50,000 dmt of lithium concentrate has been estimated for Q2 FY19.

Lithium Outlook: Lithium compounds are used in the manufacture of ceramics, glass, and consumer electronics and are an essential cathode material for long life lithium-ion batteries used in hybrid and electric vehicles, as well as mass energy storage systems. Galaxy is bullish about the global lithium demand outlook and is aiming to become a major producer of lithium products.

The China Association of Automobile Manufacturers (“CAAM”) reported total NEV production and sales of c.278,000 and c.275,000 vehicles respectively in Q1 2019, representing decent growth of 88% and 95% YoY as compared to the same period in 2018. The CAAM recently publicly revised upwards their China NEV sales projections from the previous level of 1.6 million to 1.7 million vehicles for 2019, which would represent a 35% increase YoY and puts the country on track to achieve their 2 million-vehicle per annum target by 2020.


NEV Subsidies in China for 2018 and 2019 (Source: Company Reports)

Valuation Methodology:
Method 1- EV/Sales Multiple Approach (NTM):

EV/Sales Multiple Approach (Source: Thomson Reuters), *NTM-Next Twelve Months

Method 2- EV/EBITDA Multiple Approach (NTM):

EV/EBITDA Multiple Approach (Source: Thomson Reuters), *NTM-Next Twelve Months

Note: All forecasted figures and peers have been taken from Thomson Reuters, *NTM-Next Twelve Months

Stock Recommendation: Galaxy Resources’ stock has given impressive returns of 402.99% in the past five years. In January’18, it touched its highest peak value at $4.54 which is ~154% up from the present level at $1.790 (May 22, 2019). It has bounced from its 52 weeks low levels ($1.445), and broke its strong down-trending resistance line, which indicates good probability to rise.

Strong Lithium outlook based on rising demand in the emerging markets  is expected  to overtake  global Lithium supply, which eventually would lead to an increase in Lithium chemical prices. It is expected to positively affect the Galaxy’s earnings, which would create better value for the shareholders. Government policies towards promoting alternative energy sources to oil, such as renewables (wind, solar, bio-gas, etc) are expected to boost replacement of conventional vehicles with electric vehicles (Lithium-ion battery driven), which will lead to increase in Lithium mining worldwide.

Galaxy has re-affirmed its Lithium concentrate production guidance for FY19 at 180,000 dmt to 210,000 dmt, which is a good indication in terms of Lithium exploration overall. Given the backdrop of a strong balance sheet, and decent bottom-line growth, the company’s future earnings look promising. Considering the aforesaid factors and decent outlook, we have valued the stock using two Relative valuation methods, EV/Sales and EV/EBITDA multiple and arrived at a double-digit upside growth (%). Hence, we give a “Buy” recommendation on the stock at the current market price of $1.790 per share (up 6.231% on May 22, 2019).

 
GXY Daily Chart (Source: Thomson Reuters)

 
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