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Galaxy Depends Heavily On Mt Cattlin Upgrade

Australia | Apr 24 2018

Costs were higher than forecast for lithium miner Galaxy Resources in the March quarter and brokers await process enhancements, expected to improve the production profile going forward.

-Increased ore volumes being processed meant cash costs were substantially above broker estimates
-New area to the east should deliver lower strip ratio and better grades in December
-Key catalysts include an updated feasibility study at Sal de Vida, permits hand offtake agreement


By Eva Brocklehurst

Galaxy Resources ((GXY)) disappointed brokers in the March quarter, as costs rose and feed grades dropped at Mt Cattlin. Increased volumes of ore being processed, coupled with the drop in feed grade, led to higher costs.

Shipments of 44,300t over the quarter were above the required 5.5% lithium grade and moisture and mica content were below contract specifications. Yet, 43,900t of spodumene concentrate production was -16% below the December quarter.

The March quarter results were not what UBS expected as total mined volumes were up 69%, which meant cash costs were well above estimates, at US$415/dmt.

The average grade of treated ore was 1.11% versus several broker estimates of 1.2%. The company did not report the average grade of ore that was mined in the quarter but Morgan Stanley suspects it was below forecasts. Production cash costs were up 28% from the December quarter and 31% above the broker's estimates.

Production and grades were lower than Macquarie expected while costs exceeded its forecast by 20%. The broker assumes a similar cost and production profile over the second quarter and maintains an Underperform rating.

Citi sticks with its Buy/High Risk rating but revises its earnings numbers down by -19% for 2018 on the back of the lower production and higher costs from Mt Cattlin. The broker highlights the fact the company has stopped disclosing realised pricing. Galaxy provided no comment on sales prices, other than to say that these were achieved at the higher 2018 contract price.

UBS forecasts a 10% lift in prices to US$919/t for 5.5% grade concentrate. As mining has moved to a new area with a relatively higher strip ratio, material movement is expected to stay high for the next 3-4 quarters. Grades, however, should lift back to around 1.2% in the June quarter, in the broker's view.

Galaxy is also intent on securing a new mining area to the east that should provide higher grade material and a lower strip ratio. Mining is expected to start in December.

Mt Cattlin Upgrade

The company's stated intention to improve recoveries is on track, with construction and commissioning of process plant improvements to be completed in the September quarter. The initiatives include ultra-fines DMS and secondary float re-crush circuits as well as a final product optical sorter.

Galaxy expects recoveries will improve to the mid 60% range then achieve nameplate of 70-75% in the December quarter. Morgan Stanley is a little more cautious and forecasts average recoveries to increase slightly to 60% in the second half of 2018 and then to 70% by the second half of 2019.

UBS suggests, if these recoveries are not achieved, then forecast production of 200,000t may not be achieved. The company has forecast annual production to lift to 220-240,000t once higher yields are achieved at Mt Cattlin. Citi estimates 201,000t in 2018, 210,000t in 2019 and 230,000t in 2020.

Sal de Vida

Brokers agree the Sal de Vida project requires several upcoming catalysts if approval from the board is to take place by the end of the year. These include an updated feasibility study, permit approvals and offtake agreements.

The capital and operating expenditure requirements of the feasibility study are being reviewed to take into account current market conditions and are due for completion in the June quarter. No details were provided on offtake discussions.

Macquarie lists the next catalysts as a development pathway and updated feasibility study for Sal de Vida, exploration and initial feasibility work at James Bay and a successful outcome for Mt Cattlin's upgrade.

FNArena's database shows two Buy, two Hold and one Sell (Macquarie). Ord Minnett is yet to update on the report. The consensus target is $3.52, suggesting 22.2% upside to the last share price. Targets range from $3.00 (Macquarie) to $4.50 (Citi).

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