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Galaxy’s Mt Cattlin Hitting Targets

Small Caps | Apr 04 2017

Lithium producer Galaxy Resources has made a positive impression on Canaccord Genuity after a site visit to Mt Cattlin.

-Improvements being contemplated could lift production towards 240,000 tpa
-Crushing feed is finer than desired and could lead to higher yields
-Will demand be strong enough to incentivise Sal de Vida development?

By Eva Brocklehurst

Lithium producer Galaxy Resources ((GXY)) has made a positive impression on Canaccord Genuity (Australia) after a site visit to the Mt Cattlin operation in Canada.

The main operating parameters of the mine are running in line with expectations and the broker considers production guidance of 160,000 tonnes per annum is achievable, based on conservative recovery assumptions.

Improvements currently being contemplated could lift production towards 240,000tpa. These include optical ore sorting to lift concentrate grades, recovery of spodumene from DMS middlings that are currently being stockpiled, and treatment of fines material via lower cost screening.

Canaccord Genuity expects the June quarter will be more representative of a steady-state cost profile and, in the interim, incorporates a higher strip ratio and higher processing costs into assumptions. This increases life-of-mine average production cost estimates to $430/t concentrate.

Plant Throughput

The plant has reached 90% of nameplate in terms of throughput and the broker currently models 32,500 tonnes of spodumene concentrate for the March quarter. The broker believes reaching design throughput rates of 210 tonnes/hour within the coming months is a realistic expectation.

The company has also indicated that feed from the contract crushing is finer than desired, which if optimised could lead to increased yields through capturing “near size” material that is currently delivered to the middlings product stockpile.

The tantalum circuit is largely unaltered. The broker continues to assume tantalum pricing of US$60/lb, with revisions to production estimates resulting in by-product revenue percentages decreasing to 11-12% from 15%. Similarly, this would lead to a -$30/t reduction in estimated by-product credits.

Based on the revisions to production forecasts and cost estimates, the broker’s project net present value falls by -3% to $708m, taking overall net asset value down by -3% to $0.72 per share. The broker has a Buy rating and $0.75 target. Canaccord Genuity (Australia) Limited has received a fee as the lead manager to the Galaxy Resources placement which raised $61 million in February 2017.

The company made its first shipment of spodumene concentrate in January 2017. Galaxy Resources has secured offtake of 120,000t of spodumene for 2017 at a 5.5% lithium benchmark price of US$830/t with a $15/t bonus for every 0.1% of lithium above the specification. A US$40m debt facility will provide working capital and refinance the outstanding $16m of the pre-existing debt facility.

Sal de Vida

Macquarie, while noting the successful re-design and re-commissioning of Mount Cattlin and expectations of a large amount of new supply over the near term, questions whether the longer term demand conditions will be strong enough to provide an incentive for the construction of the company’s other project, Sal de Vida in Argentina.

The company is preparing site works for Sal de Vida, which is one of the world’s largest and highest quality undeveloped lithium brine deposits. The broker values that project at $0.10 per share. Macquarie has an Underperform rating and $0.46 target.

James Bay

The company also has a lithium pegmatite project at James Bay, Quebec, which contains indicated resources of 11.75m tonnes grading at 1.3% lithium dioxide.
 

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