Small Caps | Jul 18 2017
Galaxy Resources has fulfilled its legacy 2016 contracts and is set to take advantage of robust lithium prices.
-All volumes going forward to be based on 2017 pricing
-Mt Cattlin will need to perform well in second half to achieve guidance
-Activities ramping up at Sal de Vida and James Bay
By Eva Brocklehurst
Galaxy Resources ((GXY)) enjoyed a strong finish to the June quarter which brokers believe bodes well for the second half, although overall, production at Mt Cattlin was softer and costs were higher than forecasts.
Citi expects operations to improve in the second half on the back of higher volumes and better prices. June operating performance suggests the second half run rate will be on target, with recovery rates of 61% exceeding 2017 guidance of 50-55% and mill throughput at an annualised 1.6mtpa. Going forward, all volumes are going to be price based on 2017 terms.
The company achieved an average realised price of US$724/dmt over the June quarter, and has announced that all subsequent shipments, having exhausted 2016 legacy contracts, will be based on 2017 pricing terms of US$830/t for 5.5% grade lithium concentrate and US$905/t for 6% grade product. Galaxy completed its 2016 shipment obligations in April, with sales contracted at US$600/t.
The changes in production, costs and realised prices mean Citi lowers 2017 earnings estimates by -20% and lifts 2018 and 2019 by 4% and 11% respectively. The broker also notes spot lithium markets remain robust, driven by strong Chinese demand and a pick up in electric vehicle volumes after a slow start to 2017.
Mt Cattlin will need to perform strongly in the second half to achieve on guidance, Canaccord Genuity suggests, and 2017 production guidance, maintained at 160,000t, now appears a stretch. The broker, not one of the eight monitored daily on the FNArena database, maintains a Buy rating and target of $3.50.
Catalysts
There are several catalysts occurring in the second half, including 2018 offtake agreements, a final investment decision on financing for Sal de Vida and a resource upgrade and feasibility study for James Bay.
Mt Cattlin produced 32,990t spodumene in the June quarter, and now that the first ramp up phase is complete the company will move to plant optimisation and expansion. Macquarie expects this will double production over the next 12-24 months.
Mt Cattlin contributed 11% of Australian spodumene exports in the quarter, and port data reveals exports of concentrate have effectively doubled since April. As a result, the broker expects 2018 earnings will be substantially larger, and a slightly more aggressive assumption for production rates results in an 8% increase to earnings estimates.
Macquarie, retaining an Outperform rating, believes that building on the successfully completed ramp up of Mt Cattlin will be critical to maintaining Galaxy's market share in what is expected to be a rapidly growing Australian supply base.
UBS remains Neutral on the stock. While acknowledging some strong results in the June quarter the broker awaits key catalysts. UBS wants to be more comfortable regarding whether the company can ramp up to full production at Mt Cattlin by 2019 and increase recoveries to 70-75%.
Sal De Vida, James Bay
Activities are ramping up at Sal de Vida and site infrastructure is being established. UBS is prepared to wait for progress on Sal de Vida, in regards to whether the company can secure a joint venture partner or debt funding.
The first two production wells have been completed and the company is refurbishing the test plant and commencing planning for a temporary construction camp. Canaccord Genuity also considers financing and a final investment decision at Sal de Vida a key catalyst for Galaxy.
At James Bay, resource drilling is progressing more rapidly than planned and results to date suggest the potential for a meaningful increase in the resource estimate through both depth and strike.
UBS also awaits the completion of the definitive feasibility study at James Bay to become more confident. Drilling has reached 65% of the target and results are expected in the September quarter.
There are two Buy ratings and one Hold (UBS) on FNArena's database. The consensus target is $2.25, suggesting 25.2% upside to the last share price.
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