Australia | Sep 04 2018
Galaxy Resources has obtained necessary funds via the sale of northern tenements in Argentina to push ahead with its Sal de Vida project, which also brings the timing of the James Bay decision closer.
-Further cash injection likely from strategic partnerships at Sal de Vida
-Investment decision on James Bay expected later in 2018
-Improving concentrate quality at Mt Cattlin a potential positive for marketability
By Eva Brocklehurst
Over the next six months Galaxy Resources ((GXY)) promises news which will definitively shape the outlook for the lithium producer. A financing solution at Sal De Vida (Argentina) will have implications for the timing of the James Bay (Canada) development and the enhancement project for Mount Cattlin (Western Australia) recoveries is also due shortly.
The latest news is the sale of tenements to POSCO for US$280m, which supports the Sal de Vida valuation, allowing any debt funding for the project to now be pushed out. Credit Suisse suggests the company's funding hurdle is considerably less difficult now this sale agreement has been executed.
Sale proceeds equate to 59% of the US$474m development cost. The agreement covers a package of 34 tenements in the northern basin of the Salar del Hombre Muerto. Galaxy retains the tenements that host the 1.14mt lithium carbonate reserves on which its 40-year Sal de Vida brine project is based.
There are no synergies likely to be achieved through the sale of these northern tenements to POSCO, Morgan Stanley observes, largely because of the timing of the development will be later than for Sal de Vida.
Canaccord Genuity considers the agreement with POSCO and resultant cash injection a major de-risking event for the Sal de Vida project. Along with proceeds from Mount Cattlin this should mean the company can fund the project without the need for dilutive equity financing or debt.
The broker also expects further cash injections from potential strategic partnerships, assuming this involves an equity sell-down of the asset. Market capitalisation could potentially be more than 50% backed by cash by the end of 2018, the broker suggests. Canaccord Genuity, not one of the eight stockbrokers monitored daily on the FNArena database, reiterates a Buy rating and $5.00 target.
A sell-down to a strategic partner appears the most likely outcome at Sal de Vida and management has indicated there is strong interest in the transaction. The company is seeking continued capacity to develop James Bay and an investment decision is expected this year.
The company has shortlisted 12 parties for the sell-down of a stake of up to 40% of the southern Sal de Vida project, unaffected by the tenements sold to POSCO. Citi values the project at US$600m or $2 a share based on 25,000 tpa and long-term industrial grade lithium carbonate prices of around US$7500/t.
Citi envisages potential for a return of excess cash in 2019, once any sell down of Sal de Vida is confirmed and capital expenditure requirements for projects in 2019 and beyond are better understood.
UBS believes as Mount Cattlin should maintain margins at over US$500/t over the medium term, and even with the expenditure forecasts for Sal de Vida, Galaxy may still be close to its first ever return to shareholders.
Successful advancing of the Sal de Vida project and a turnaround in market sentiment towards lithium pricing are both needed to push the stock higher, the broker adds.
Citi envisages potential for a return of excess cash in 2019 once any sell down of Sal de Vida is confirmed and capital expenditure requirements for projects in 2019 and beyond are better understood.
Mt Cattlin
The company has made no change to Mount Cattlin operating guidance and spodumene prices remain contracted for 2018, while the recovery enhancement project is on track for commissioning in the third quarter. Nameplate recoveries of 70-75% are expected from the December quarter.
The company is seeking to improve the concentrate quality, which may have positive implications for marketability and pricing of future concentrate. This should enable a sustainable 220-240,000 tpa production rate for spodumene concentrate over the remaining 6-7 year resource life.
A secondary benefit of the recovery upgrade is an improvement in the quality of concentrate, probably via the elimination of more deleterious elements, such as iron, sodium and potassium, that are problematic for downstream converters.
FNArena's database shows three Buy ratings and two Hold. The consensus target is $3.61, suggesting 35.2% upside to the last share price.
See also, Sal De Vida Offtake Next Catalyst For Galaxy on July 18, 2018.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
