Galaxy Resources Limited

 GXY Details

Sal de Vida Project to Adopt Battery Grade Production: Galaxy Resources Limited (ASX: GXY) is engaged in the production of lithium concentrate and mining of minerals in Canada, Australia, and Argentina. GXY owns the Mt Cattlin mine (100%) in Western Australia, producing spodumene and tantalum concentrate. It is also developing the Sal de Vida lithium brine project (100%) in Argentina. As of 25 March 2021, the market capitalisation of the company stood at ~$1.16 billion. On 25 March 2021, GXY updated on the test results and outcome of its piloting on-site for the last year on Sal de Vida’s project. It has confirmed improved project metrics from the results, achieving the battery-grade quality and integration into the Stage 1 project schedule.

Updated Reserve and Resource Estimate: The company announced a revised estimate for Mt Cattlin Mineral Resource at 12.0Mt @ 1.3% Li2O (lithium oxide) and Ore Reserve at 8.0Mt @ 1.1% Li2O. It also informed the depletion of ore reserve by 0.25Mt due to mining activity and commencement of measures to optimise Mt Cattlin’s resource during the current quarter.

A Look at the FY20 Financials: The company reported a revenue of US$55.29 million for FY20, down by 20% YoY, due to lower realised spodumene prices. Its net loss after tax for FY20 declined by 89% YoY to US$31.30 million. For FY20, GXY produced 108,658 dmt of lithium concentrate, exceeding the guidance range of 90k – 105k dmt initially provided. GXY held a cash balance of US$210.43 million, up by 109% YoY as of 31 December 2020. The Group had cash outgoings of US$13.5 million from operating activities for FY20.

FY20 Financial Highlights (Source: Company Reports)

Key Risks: The company bears the risk of managing work and mobilising staff/contractors from one state to another due to COVID-19 travel restrictions and modified protocols at work. It also faces the risk of successful development of the project to commence production of the minerals.

Outlook: At Mt Cattlin, GXY is ramping up production due to improved market demand. GXY has started multi-year offtake agreements with a key customer and will continue to market based on spot pricing in FY21 as prices recover. GXY anticipates completing the James Bay project construction by the end of FY21 and targeting the first production in late FY22.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, 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.

*1USD= ~1.31 AUD

Stock Recommendation: The stock of GXY gave a positive return of 96.84% in the past six months and a positive return of 182.58% in the past nine months. The stock is currently trading higher than the 52-weeks’ average price level of $0.698-$3.29. The stock of GXY has a support level of ~$2.145 and a resistance level of ~$2.446. We have valued the stock using the Enterprise Value to Sales based illustrative relative valuation method and have arrived at a target price of high single-digit upside (in % terms). For this purpose, we have taken peers like Pilbara Minerals Limited (ASX: PLS), Orocobre Limited (ASX: ORE), IGO Limited (ASX: IGO), to name a few. We believe that the company can trade at a slight premium than its peer median, considering its FY20 production above the guidance estimate and positive results from the pilot testing at the Sal de Vida project. Considering the current trading levels, FY20 production levels and improved demand conditions at Mt Cattlin, offtake agreements for Mt Cattlin for FY21 and recovery in prices, and valuation, we give a ‘Hold’ rating on the stock at the current market price of A$2.270, down by 1.732% on 25 March 2021.

GXY Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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