Galaxy Resources Limited

GXY Details

Update on Mt Cattlin: Galaxy Resources Limited (ASX: GXY) is engaged in mineral exploration and processing. The company's principal activities include the production of Lithium Carbonate and exploration for minerals. GXY has provided an update on mineral resource estimate and ore reserve for its Mt Cattlin project in Western Australia. The project is generating more than 40k dry metric tonnes (dmt) of spodumene concentrate in Q2. The project has generated spodumene grade at 5.77% Li2O, as per customer requirements. GXY has shipped 33,500 wet metric tonnes (wmt) in May. The company has revised its estimates for Mt Cattlin Mineral Resource to 11.0Mt @1.2% Li2O and 151 ppm Ta2O5. Ore reserve estimated at 8.0Mt @ 1.04% Li2O and 139 ppm Ta2O5. 

1QFY21 Activities Highlights: GXY has reported that the feasibility study at Sal de Vida project in Argentina has confirmed brine operation with lowest quartile capital and operating cost. Initial production at the project is likely at 10,700 tpa of battery grade lithium carbonate (LC) and reaching at ~32ktpa, going forward. As per Preliminary Economic Assessment (PEA), James Bay project in Canada confirmed to be a highly competitive spodumene project. GXY reported as on 31 March 2021 to be debt-free with cash and financial assets of US$217mn. 

FY20 Financial Highlights: GXY has registered a decline in its sales revenue to US$55.29mn in FY20 against US$69.51mn in FY19. The company has incurred a loss of US$31.3mn in FY20, due to lower realised prices for spodumene. GXY has reported an increase in its cash balance to US$210.43mn as on 31 December 2020 against US$100.90mn as on 31 December 2019.

Revenue Trend (Source: Analysis by Kalkine Group)

Key Risks: The company is mainly engaged in the production and shipment of spodumene concentrate. Therefore, any supply chain disruptions may impact the business of the company. The company is exposed to adverse changes in foreign currency prices, which may impact the financials of the company. 

Outlook: GXY continues to witness a decent customer demand for spodumene concentrate on the back of rising global Electric Vehicle sales. The company has revised its production guidance for spodumene products to 195,000-210,000 dmt from previous range of 185,000-200,000 dmt. GXY has finalised 15kt of spodumene shipment for June 2021 and pricing for Q3 scheduled shipment is expected to be above US$750/mt CIF for 6.0% Li2O. 2NW mining is expected to accelerate with first phase of pre-strip to begin in 2H 2021. 

Valuation Methodology: EV/Sales based Relative Valuation Method (Illustrative) 

Source: Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The stock of GXY gave a return of ~64.34% in the last three months and a return of ~98.51% in the last six months. The current market capitalisation of GXY stands at ~$2.00 as of 3 June 2021. The stock is currently trading above the average 52-weeks’ price level range of ~$0.742 and ~$4.170. On the technical analysis front, the stock has a support level of ~$3.623 and a resistance of ~$4.157. We have valued the stock using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price with a correction of high single-digit downside (in % terms). We believe that the company can trade at a slight premium as compared to its peer average, considering an increase in consumer demand for spodumene concentrate and an increase in cash balance as on 31 December 2020. For this purpose, we have taken peers Orocobre Ltd (ASX: ORE), Pilbara Minerals Ltd (ASX: PLS), Hawkstone Mining Ltd (ASX: HWK) to name a few. Considering the company has declared a decline in revenues in FY20, incurred a loss in FY20, trading at higher levels, and valuation, we suggest investors to book profit and give a “Sell” rating on the stock at the current market price of $4.01, up by ~1.007% as on 3 June 2021.

GXY Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above. 

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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