Galaxy Resources Limited

Non-Cash Impairment: Galaxy Resources Limited (ASX: GXY) is into the production of lithium concentrate and exploration for minerals in Australia, Canada, and Argentina. The market capitalisation of the company stood at ~A$466.65 Mn as on 7^th August 2019. Recently, the company announced that it has been undertaking a review of its inventory on hand at Mt Cattlin, capitalised Mt Cattlin mine development costs attributable to the acquisition of General Mining Limited and deferred tax assets arising from capitalised tax losses. The company further stated that the review is ongoing,and it will be wrapped up before finalisation of the company’s financial statements for the half-year ended 30 June 2019.

Based on the current information, the company is anticipated that the review will result in a non-cash impairment for half-year ended 30 June 2019. It has been estimated that the impairment would be in the vicinity of US$150 Mn - US$185 Mn. As at June 30, 2019, the company held cash of US$176.3 Mn, marketable securities of US$27.2 Mn, and nil debt. With respect to Mt Cattlin, the company stated that it witnessed record production in Q2 FY19.

It delivered unit cash cost of US$337/dmt (FOB) in Q2 FY19.Mt Cattlin is one of the lowest-cost producers of lithium concentrate, globally, with highly competitive product quality. The following picture provides a broader idea of Mt Cattlin Production & Sales Statistics:


Mt Cattlin Production & Sales Statistics (Source: Company Reports)

What to Expect: In terms of Mt Cattlin, it is targeting 45-55kt spodumene production in Q3 FY19. The company has a dedicated focus on productivity improvements and further rationalizing cash costs. It is also exploring potential downstream opportunities with existing customers. With respect to James Bay, the company stated that Phase 2 test work for downstream operation is underway and the results for the same are anticipated in 2H FY19.

Stock Recommendation: The company reported a gross margin and EBITDA margin of 16.5% and 35.3% in FY18 as compared to the industry median of 40.5% and 29.5%, respectively. The current ratio of the company stood at 2.96x in FY18 against the industry median of 1.71x, which represents that GXY is well-placed to address its short-term obligations. The company posted an asset to equity ratio of 1.20x in FY18 in comparison to the industry median of 1.72x. Hence, considering the above-stated facts and current trading levels, we give a “Hold” recommendation on the stock at the current market price of A$1.145 per share (up 0.439% on 7^th Aug 2019).
 

Orocobre Limited

Commencement of Construction of New Plant:Orocobre Limited (ASX: ORE) is a small-cap company with the market capitalisation of ~A$664.66 Mn as of 7^th August 2019. Recently, the company, with the help of a release dated 6^th August 2019 announced that ORE’s MD and CEO Mr. Martín Pérez de Solay, Toyota Tsusho Corporation and Toyotsu Lithium Corporation representatives had hosted a groundbreaking ceremony for signifying the beginning of construction at the Naraha Lithium Hydroxide Plant.  The company further stated that Naraha Lithium Hydroxide Plant is first of its kind which is to be constructed in Japan. Adding to that, it was stated that Naraha Lithium Hydroxide Plant has been designed to convert primary grade lithium carbonate feedstock sourced from the Olaroz Lithium Facility into purified battery grade lithium hydroxide.

The company released its results for June 2019 quarter. With respect to Olaroz Lithium Facility, it reported production of 3,455 tonnes in Q4 FY19, reflecting a fall of 4% on pcp.It delivered quarterly sales revenue amounting to US$27.8 Mn, reflecting a fall of 17% on a QoQ basis with a realised average price achieved of US$8,220/tonne on a free on board basis. The following picture provides an overview of production and sales:

 
Production and Sale (Source: Company Reports)

Future Prospects: The company stated that its growth projects are fully financed and the expansion of Olaroz Stage 2 is underway. It is expecting production for FY19 to be like FY18. The company is having decent liquidity levels (as can be seen from 1H FY19 current ratio) which might help it making deployments moving forward.

Stock Recommendation: The company reported a gross margin of 24.8% in 1H FY19 against the industry median of 41.6%.  The company delivered a return on equity of 4.7%, which implies an increase of 1% on a YoY basis. The current ratio of the company stood at 49.97x in 1H FY19 as compared to the industry median of 1.89x. This implies that ORE is well-positioned to meet its short-term obligations against the broader industry. As per ASX, the company’s stock is trading towards the 52-week lower levels, which can be considered as a respectable opportunity to buy. Hence, in view of aforesaid parameters coupled with decent outlook and current trading levels, we give a “Buy” recommendation on the stock at the current market price of A$2.560 per share (up 0.787% on 7^th Aug 2019).  

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