Lithium: Producer / Developer

Transcription

1 GXY.asx Accumulate Lithium: Producer / Developer Galaxy Resources Ltd (GXY) GALAXY RESOURCES LTD (GXY) James Bay resource upgrade positive for valuation Galaxy Resources Ltd recently upgraded the James Bay resource to 40.8 Li2O, which is almost double the previous estimate (22.2Mt) and at better grade (1.4% versus 1.3% previously). We have increased our throughput assumptions for James Bay which has increased our valuation for the asset to A$1.15/shr. Given the potential for nearer term cash flow, our James Bay valuation is ~70% of Sal de Vida. Higher spodumene selling prices in CY18 The Company recently announced that offtake pricing for CY18 is higher than CY17. As a reminder, the 2017 pricing structure was US$830/t for 5.5% grade lithium concentrate, and US$905/t for 6.0% grade product. We had assumed average received price of US$850/t for CY18 and have now increased it to US$955/t. Note that the offtake allows for GXY to toll-treat some spodumene and market its own Lithium Carbonate, and our spodumene selling price reflects this. Upgrade to Accumulate (from Neutral) We are upgrading our recommendation to Accumulate (from Neutral). Our base case valuation has improved to $2.73/sh by increasing our James Bay valuation and pushing through higher selling prices in CY18, but we assume no change to our CY19 estimate of US$800/t. Our spot price valuation (using US$1000/t for 5.5% Li2O spod. and US$20k for LC) is $7.21. There is still substantial upside if lithium prices are stronger for longer, but also downside if they weaken to our assumptions. We use NPV12 for our Sal De Vida and James Bay valuations. We recognise that industry could use lower discounts, which would increase our base valuations, particularly Sal De Vida given long lead time to first cash flow. At spot prices, NPV8, our GXY valuation is >$10, highlighting a very high bull case valuation potential. The next key catalysts should be Q4 production and CY17 earnings results in January and February, followed by an update or formal Sal De Vida financing. The March quarter production will also be important to give a better indication of the CY18 selling prices that have been achieved. Fig. 1: James Bay looking like a good development Share Price Valuation $2.73 Price Target (12 month) $3.73 Brief Business Description: Production from the Mt Cattlin spodumene mine. Developing the large lithium brine operation Sal de Vida and the James Bay spodumene deposit. Hartleys Brief Investment Conclusion One of the few Companies that is in production of lithium. Growth potential from Sal De Vida and James Bay. Chairman & MD Martin Rowley (Exec. Chairman) Anthony Tse (MD) Major Shareholders Ausbill 6.9% Blackrock 6.3% Company Address Level 4 / 21 Kintail Road Applecross, WA 6153 Issued Capital 403.3m - fully diluted Market Cap - fully diluted Cash (30 Sep 17a) Debt (30 Sep 17a) 7 Dec 2017 $ m A$1369.3m A$1449.3m A$57.4m A$8.5m Prelim. (A$m) CY17e CY18e CY19e Prod (Li Spod. eq) Op Cash Flw Norm NPAT A$ 10. M Dec-16 Galaxy Resources Apr-17 Aug Dec-17 Volume - RHS Source: IRESS GXY Shareprice - LHS Sector (S&P/ASX SMALL RESOURCES) - LHS Trent Barnett Head of Research Ph: E: trent.barnett@hartleys.com.au Source: GXY Hartleys Limited ABN (AFSL ) 141 Page St Georges 1 of 6 Terrace, Perth, Western Australia, 6000 Hartleys does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Further information concerning Hartleys regulatory disclosures can be found on Hartleys website

2 Galaxy Resources Share Price 7 December 2017 GXY $3.395 Accumulate Key Market Information Directors Company Information Share Price $3.395 Martin Rowley (Exec. Chairman) Level 4 / 21 Kintail Road Market Capitalisation - ordinary A$1369m Anthony Tse (MD) Applecross, WA 6153 Net Debt (cash) -$49m Peter Bacchus (Non-exec) Ph Market Capitalisation - fully diluted A$1449m George Zheng (Non-exec) John Turner (Non-exec) Issued Capital 403.3m Options 23.6 Top Shareholders m shares % ord Issued Capital (diluted for options) 426.9m Ausbill % Blackrock % Reserves & Resources Mt Li % Ta2O5 Mt Cattlin M+I % month price target $ Mt Cattlin Inf % Mt Cattlin Total % 149 P&L Unit 31 Dec Dec Dec Dec 20 3 Mt Cattlin Reserve % 149 Net Revenue A$m Gross Profit A$m James Bay M+I % Total Costs A$m James Bay Inf - EBITDA A$m James Bay Total % - margin 32% 52% 45% 40% 7 James Bay Reserve - Depreciation/Amort A$m Global Spod. Total % EBIT A$m Global Spod. Reserve % 149 Net Interest A$m Pre-Tax Profit A$m Cub. m. mg/l LC Mt KCl Mt Tax Expense A$m Sal de Vida Resource Normalised NPAT A$m Sal de Vida Reserve Abnormal Items A$m Spodumene Production Summary Unit Dec 17 Dec 18 Dec 19 Dec 20 Dec 21 Reported Profit A$m Processed Mill Throughput Mt Minority A$m Mined grade Li % 1.1% 1.1% 1.0% 1.1% 1.2% Profit Attrib A$m Produced Spodumene - Technical kt Produced Spodumene - Battery kt Balance Sheet Unit 31 Dec Dec Dec Dec 20 Produced Tantalite klb pa Cash A$m Produced Spodumene - Battery Eq kt Other Current Assets A$m LCE equiv Kt Total Current Assets A$m Mine Life yr Property, Plant & Equip. A$m Assumed Mining Inventory Mt Exploration A$m Investments/other A$m Tot Non-Curr. Assets A$m Costs Unit Dec 17 Dec 18 Dec 19 Dec 20 Dec 21 Total Assets A$m Cost per milled tonne $A/t EBITDA / tonne milled ore $A/t Short Term Borrowings A$m Total cost per milled tonne $A/t Other A$m Total Cash Costs $A/t Spod. Bat Total Curr. Liabilities A$m US$ $US/t Spod. B Long Term Borrowings A$m C1: Operating Cash Cost = (a) $A/t Spod. Bat Other A$m (a) + Royalty = (b) $A/t Spod. Bat Total Non-Curr. Liabil. A$m C2: (a) + depreciation & amortisation = (c) $A/t Spod. Bat Total Liabilities A$m (a) + actual cash for development = (d) $A/t Spod. Bat ,031 1, Net Assets A$m AISC: (c) + Royalty $A/t Spod. Bat Net Debt (net cash) A$m (d) + Royalty $A/t Spod. Bat ,082 1, Price Assumptions Unit Dec 17 Dec 18 Dec 19 Dec 20 Dec 21 Cashflow Unit 31 Dec Dec Dec Dec 20 AUDUSD US$/A$ Operating Cashflow A$m LC US$/t 12,931 14,009 12,672 11,439 10,941 Income Tax Paid A$m Spodumene - Battery US$/t Interest & Other A$m Tantalum US$/lb Operating Activities A$m Hedging Unit Dec 17 Dec 18 Dec 19 Dec 20 Dec 21 Spodumene Property, Plant & Equip. A$m Sensitivity Analysis Exploration and Devel. A$m Valuation FY21 NPAT Other A$m Base Case Investment Activities A$m Spot Prices 7.21 (164.4%) (430.2%) Spot USD/AUD 0.75, Chemical Spod $1000/t, LC $20,000/t,Tant. $60/lb. Borrowings A$m AUDUSD +/--10% 2.25 / 3.31 (-17.6% / 21.5%) 21.5 / 67.2 (-48.9% / 59.8%) Equity or "tbc capital" A$m Spodumene - Technical +/--10% 2.73 / 2.73 (0.0% / 0.0%) 42.0 / 42.0 (0.0% / 0.0%) Dividends Paid A$m Spodumene - Chemical +/--10% 3.13 / 2.32 (14.9% / -14.9%) 68.1 / 16.0 (62.0% / -62.0%) Financing Activities A$m Tantalite +/--10% 2.74 / 2.72 (0.3% / -0.3%) 42.5 / 41.6 (1.1% / -1.1%) Production +/--10% 3.39 / 2.07 (24.2% / -24.2%) 68.0 / 16.1 (61.8% / -61.8%) Net Cashflow A$m Operating Costs +/--10% 2.46 / 3.00 (-10.0% / 10.0%) 29.4 / 54.7 (-30.1% / 30.1%) Unpaid Capital Shares (GXY terms) Unit 31 Dec Dec Dec Dec 20 Year Expires No. (m) $m Avg price % ord Ordinary Shares - End m Dec % Ordinary Shares - W'ted m Dec % Diluted Shares - W'ted m Dec % 31-Dec % Ratio Analysis (GXY) Unit 31 Dec Dec Dec Dec Dec % Cashflow Per Share A$ cps TOTAL % Cashflow Multiple x Valuation $m $/GXY Earnings Per Share A$ cps % Mt Cattlin (pre-tax NAV at disc. rate of 10%) Price to Earnings Ratio x Sal de vida Dividends Per Share AUD % of James Bay Dividend Yield % 0.0% 0.0% 0.0% 0.0% Corporate Overheads Net Debt / Net Debt + Equity% -435% -518% 19% 48% Net Cash (Debt) Interest Cover X 10.0 na Tax (NPV future liability) Options & Other Equity Return on Equity % 43% 58% 26% 17% Total Yes Analyst: Trent Barnett "tbc capital" could be equity or debt. Our valuation is risk-adjusted for how this may be obtained. Sources: IRESS, Company Information, Hartleys Research 7 Dec 17 Page 2 of 6

3 Fig. 2: Hartleys Earnings Changes P&L CY17 CY18 CY19 Old New % Old New % Old New % Production Spodumene Ktpa % % % - product grade 5.7% 5.7% 0.0% 5.8% 5.8% 0.0% 5.8% 5.8% 0.0% Tantalite klb % % % Selling Prices Spodumene - Chemical 5.5% US$/t % % % Tantalite US$/t % % % US$/A$ % % % Net Revenue A$m % % % Total Costs A$m % % % - per t A$ % % % - per t US$ % % % EBITDA A$m % % % - margin 32% 32% 0.0% 47% 52% 11.1% 45% 45% 0.0% - per t A$ % % % Depreciation/Amort A$m % % % EBIT A$m % % % Net Interest A$m % Pre-Tax Profit A$m % % % Tax Expense A$m Normalised NPAT A$m % % % Abnormal Items A$m Reported Profit A$m % % % Minority A$m Profit Attrib A$m % % % Net Debt (net cash) A$m % % ###### Capex A$m % % % DPS Source: Hartleys Estimates, IRESS Fig. 3: Key Assumptions and Risks for valuation Assumption Risk of not realising assumption Downside risk to valuation if assumption is incorrect Comment ~15 year mine life at Mt Cattlin Low Meaningful This appears reasonable based on current resources Recoveries improve to 70-75% through CY18 Spodumene prices in line with our estimates Upside/downside Meaningful The capex is expected to be completed by April 2017, but we assume six months to reach 72%. Hopefully the optimisation can be faster and we are too conservative Upside/downside Meaningful We assume prices are yet to peak Sal De Vida is developed High High Sal De Vida appears highly economic, but will take time for first cash flows James Bay is developed High Low We assume James Bay is developed in our valuation with a 20 year mine life at 2Mtpa No new financing Low Meaningful We assume the project is fully funded. Exploration value Moderate Meaningful We assume modest exploration value. Conclusion Source: Hartleys Selling prices of spodumene and lithium carbonate and the development of Sal de Vida are significant risks to valuation. Page 3 of 6

4 PRICE TARGET We have changed our price target to $3.73 (from $3.57 previously). Price Target Methodology Weighting Spot 12 mth out NPV base case 75% $2.73 $2.94 NPV base case Mt Cattlin only 1% $0.67 $0.74 NPV at spot commodity and fx prices 10% $7.21 $8.12 NPV base case all assets NPV8 5% $4.67 $5.02 NPV spot prices, all assets NPV8 3% $11.69 $12.88 NPV spod US$450/t, LC US$8,000/t 6% $0.97 $1.16 Risk weighted composite $ Months Price Target $3.73 Shareprice - Last - GXY $ mth total return (% to 12mth target + dividend) 9.9% Source: Hartleys Estimate Page 4 of 6

5 RISKS The largest risk for GXY are the selling prices of spodumene and lithium carbonate. Other risks are similar to most producers: mine planning, mill performance, forcemajeure, counter party risks, mine life extensions, expansions. Fig. 4: Using Hartleys base case commodity forecasts Shareprice GXY Actual Hartleys Target 8x EV/EBITDA 6x EV/EBITDA 4x EV/EBITDA 2x EV/EBITDA 1x EV/EBITDA Source: Hartleys Estimates, IRESS Fig. 5: Using spot commodity prices Shareprice GXY Actual 8x EV/EBITDA 6x EV/EBITDA 4x EV/EBITDA 2x EV/EBITDA 1x EV/EBITDA Source: Hartleys Estimates Page 5 of 6

6 HARTLEYS CORPORATE DIRECTORY Research Trent Barnett Head of Research Mike Millikan Resources Analyst John Macdonald Resources Analyst Paul Howard Resources Analyst Aiden Bradley Research Analyst Michael Scantlebury Junior Analyst Janine Bell Research Assistant Corporate Finance Dale Bryan Director & Head of Corp Fin. Richard Simpson Director Ben Crossing Director Ben Wale Associate Director Stephen Kite Associate Director Scott Weir Associate Director Scott Stephens Associate Director Rhys Simpson Manager Registered Office Level 6, 141 St Georges TcePostal Address: PerthWA 6000 GPO Box 2777 Australia Perth WA 6001 PH: FX: info@hartleys.com.au Note: personal addresses of company employees are structured in the following manner:firstname.lastname@hartleys.com.au Hartleys Recommendation Categories Buy Accumulate Neutral Reduce / Take profits Sell No Rating Speculative Buy Share price appreciation anticipated. Share price appreciation anticipated but the risk/reward is not as attractive as a Buy. Alternatively, for the share price to rise it may be contingent on the outcome of an uncertain or distant event. Analyst will often indicate a price level at which it may become a Buy. Take no action. Upside & downside risk/reward is evenly balanced. It is anticipated to be unlikely that there will be gains over the investment time horizon but there is a possibility of some price weakness over that period. Significant price depreciation anticipated. No recommendation. Share price could be volatile. While it is anticipated that, on a risk/reward basis, an investment is attractive, there is at least one identifiable risk that has a meaningful possibility of occurring, which, if it did occur, could lead to significant share price reduction. Consequently, the investment is considered high risk. Institutional Sales Carrick Ryan Justin Stewart Simon van den Berg Chris Chong Digby Gilmour Veronika Tkacova Wealth Management Nicola Bond Bradley Booth Adrian Brant Nathan Bray Sven Burrell Simon Casey Tony Chien Tim Cottee David Cross Nicholas Draper John Featherby Ben Fleay James Gatti John Goodlad Andrew Gribble David Hainsworth Murray Jacob Gavin Lehmann Shane Lehmann Steven Loxley Andrew Macnaughtan Scott Metcalf David Michael Jamie Moullin Chris Munro Michael Munro Ian Parker Matthew Parker Charlie Ransom (CEO) Mark Sandford David Smyth Greg Soudure Sonya Soudure Dirk Vanderstruyf Samuel Williams Jayme Walsh Disclaimer/Disclosure The author of this publication, Hartleys Limited ABN ( Hartleys ), its Directors and their Associates from time to time may hold shares in the security/securities mentioned in this Research document and therefore may benefit from any increase in the price of those securities. Hartleys and its Advisers may earn brokerage, fees, commissions, other benefits or advantages as a result of a transaction arising from any advice mentioned in publications to clients. Any financial product advice contained in this document is unsolicited general information only. Do not act on this advice without first consulting your investment adviser to determine whether the advice is appropriate for your investment objectives, financial situation and particular needs. Hartleys believes that any information or advice (including any financial product advice) contained in this document is accurate when issued. Hartleys however, does not warrant its accuracy or reliability. Hartleys, its officers, agents and employees exclude all liability whatsoever, in negligence or otherwise, for any loss or damage relating to this document to the full extent permitted by law. Page 6 of 6