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Galaxy Flags Strategic Value In Sal De Vida

Australia | Mar 27 2018

Galaxy Resources has updated Mt Cattlin estimates and signalled its highly-anticipated Sal de Vida financing/offtake decisions may extend to late 2018.

-Resource development drilling could provide longer mine life at Mt Cattlin
-Interest in Sal de Vida from financing/offtake partners is high
-Share price likely to bounce around, reflecting developments and lithium price

 

By Eva Brocklehurst

Brokers keenly await drilling results and development approvals from lithium producer Galaxy Resources ((GXY)), which will provide the catalysts for the stock over 2018. The company updated its resources and reserves estimates with its 2017 results, which drew mixed responses. Underlying operating earnings (EBITDA) were $51.9m. Net profit was $170,000.

Higher depreciation & amortisation combined with non-cash expenses affected the profit line but such accounting adjustments mean the result has little bearing on broker views on the investment outlook. Revenue was in line with UBS estimates and underlying operating earnings below, while high margins are expected to be maintained. The results imply margins of US$450/t were achieved.

Canaccord Genuity anticipates around 28% production growth in 2018, expected to be driven by modifications to the Mt Cattlin process plant, and improved recovery should lift concentrate production. No exact pricing guidance has been provided for 2018 but the broker expects prices to be firmer and earnings set to benefit from toll treating/sale of refined lithium chemicals.

Mt Cattlin

Mt Cattlin resources have been re-cut following completion of grade control drilling and now total an estimated 11.6mtpa at 1.2% lithium oxide. Tonnage is down -29% but grade has improved by 11% on prior estimates.

Total reserves have been re-estimated at 7.6mtpa at 1.05% lithium versus prior estimates of 10mtpa at 1.05%. The main issue for brokers is the lift required in recoveries to 70-75% post the June quarter, from a December quarter average of 58%.

The updated reserve implies mine life of around five years and Canaccord Genuity believes additional resources/reserves from regional targets and resource development drilling within the mining lease could provide a longer mine life.

Sal de Vida

Management has suggested finalising the offtake for Sal de Vida may now extend into late 2018. Canaccord Genuity understands that interest from potential project financing/offtake partners is high and aligning various competing interests makes for a complex negotiation. Still, brokers consider this will be the main catalyst for the share price this year.

There are few development-ready lithium projects globally where production is uncommitted and this enhances the strategic value of Sal de Vida. Canaccord Genuity, not one of the eight stockbrokers monitored daily on the FNArena database, maintains a Buy rating and $5.00 target.

Two thirds of Ord Minnett's valuation of the stock relates to Sal de Vida. The broker assumes first production occurs in 2021. The base case is for Galaxy to source capital through debt markets but the broker acknowledges the potential for a strategic partner is high.

UBS believes the company is hoping a mix of both end-user OEMs and potential sell-down partners will provide the majority of the capital required to develop the project.

Meanwhile, James Bay continues to progress and environmental permits are expected to take around two years. UBS notes, unlike Mt Cattlin, this is planned as an integrated upstream and downstream operation with feasibility studies being undertaken this year.

Citi envisages a long lead time for both Sal de Vida and James Bay, expecting the share price to bounce around as the studies, developments and pending regulatory approvals take place, as well as reflecting movements in the lithium price.

FNArena's database shows two Buy, two Hold and one Sell (Macquarie, yet to report on the result). The consensus target is $3.58 suggesting 13.3% upside to the last share price. Targets range from $3.00 (Macquarie) to $4.60 (Citi).

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