Lithium: Producer / Developer

Transcription

1 Lithium: Producer / Developer GXY.asx Accumulate Galaxy Resources Ltd (GXY GALAXY RESOURCES LTD (GXY) Production on track for CY17 estimate Galaxy Resources recently released June quarter production. Mt Cattlin produced ~33kt (~23.5kt MarQ) of spodumene concentrate in the quarter at an average realised price of US$724/t (less the 5% marketing costs) which consisted of combination of the old 2016 price (55%) and of the new 2017 pricing (45%) terms. All of the 2016 contract volumes have now been delivered, along with all customer offtake prepayments, meaning that future production will be sold into the 2017 pricing structure receiving US$830/t for 5.5% grade lithium concentrate, and US$905/t for 6.0% grade product. Production cash costs for the quarter were US$393/dmt of spodumene concentrate (US$389 March Qtr) which was slightly better than our assumptions. The Company generated gross operating cash flow (EBITDA) of A$13.2m ($7.5m MarQ), suggesting annualised EBITDA of A$50m pa and a margin of ~A$400/t. We expect CY18 EBITDA of A$83m. The Company noted that it had a strong finish to the June quarter and it was able to exceed its run-rate (160ktpa) in the month of June, producing ~14kt (~168ktpa annualised) of spodumene at costs of US$334/dmt, which the Company believes will be the baseline for future production. The Company needs to produce ~74kt of spodumene in the 2 nd half of CY17 to reach our forecast production of 130kt of spodumene for CY17, which appears achievable. Recoveries improving, targeting 70-75% Recoveries have also been increasing at Mt Cattlin, with 61% recoveries in the month of June, exceeding our assumed 50% recovery rate. GXY has also started evaluating options to increase recoveries further, including ultra-fines DMS circuit, secondary float re-crush circuit and a final product optical sorter to increase recoveries to 70-75%. This is lower than our assumed eventual target of 85%, which we now assume tops out at 72.5%. We have lowered our CY18 recoveries to 72.5%, to err on the conservative side. We assume A$25m of capex to include the process upgrade, including improvements to the crusher. Sal de Vida and James Bay continue to progress GXY completed the first two production wells at Sal de Vida, with flow rates in one of the wells better than expected at 25L/sec. James Bay delivered some excellent drill results during the quarter including: 1.65 Li2O% from 73m, 1.56 Li2O% from 13m, 1.5 Li2O% from 138m and 1.64 Li2O% from 119m. If these drill results were delivered a year ago we believe that the market reaction may have been more positive. Both these development projects are important to our valuation, although Sal De Vida is by far the most important. Maintain Accumulate We maintain our Accumulate recommendation, with a valuation of $2.25. Our spot price valuation (using US$850/t for 5.5% Li2O) is $3.82. In our valuation Mt Cattlin contributes $0.83. Using spodumene prices of US$450/t and LC US$8,000/t, our GXY valuation is only ~$0.50 however. Share Price Valuation $2.25 Price Target (12 month) $2.43 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 Blackrock 6.9% Company Address Level 4 / 21 Kintail Road Applecross, WA 6153 Issued Capital 395.8m - fully diluted Market Cap - fully diluted Cash (30 Jun 17a) Debt (30 Jun 17a) A$40.4m A$13.3m Prelim. (A$m) CY17e CY18e CY19e Prod (Li Spod. eq) Op Cash Flw Norm NPAT Aug-16 Trent Barnett Head of Research Ph: Galaxy Resources E: trent.barnett@hartleys.com.au 27 Jul 2017 $ m A$742.2m A$800.1m A$ 2.00 M Dec-16 Apr Jul-17 Volume - RHS Source: IRESS GXY Shareprice - LHS Sector (S&P/ASX SMALL RESOURCES) - LHS 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 SUMMARY MODEL Galaxy Resources Share Price 27 July 2017 GXY $1.875 Accumulate Key Market Information Directors Company Information Share Price $1.875 Martin Rowley (Exec. Chairman) Level 4 / 21 Kintail Road Market Capitalisation - ordinary A$800m Anthony Tse (MD) Applecross, WA 6153 Net Debt (cash) -$27m Peter Bacchus (Non-exec) Ph Market Capitalisation - fully diluted A$800m George Zheng (Non-exec) John Turner (Non-exec) Issued Capital 395.8m Xi Xi (Non-exec) Options 30.9 Top Shareholders m shares % ord Issued Capital (diluted for options) 426.7m 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$m James Bay M+I % Total Costs A$m James Bay Inf % EBITDA A$m James Bay Total % - margin 34% 46% 49% 39% 7 James Bay Reserve - Depreciation/Amort A$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 Mt Cattlin Production Summary Unit Dec 16 Dec 17 Dec 18 Dec 19 Dec 20 Dec 21 Reported Profit A$m Processed Mill Throughput Mt Minority A$m Mined grade Li % 1.0% 1.0% 1.0% 1.0% 1.0% 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 Assumed Mining Inventory - Li grade % 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% Investments/other A$m Assumed Mining Inventory - Tant grade % Tot Non-Curr. Assets A$m Costs Unit Dec 16 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 $A/t Spod. Batt. eq Total Curr. Liabilities A$m US$ $US/t Spod. Batt. eq Long Term Borrowings A$m C1: Operating Cash Cost = (a) $A/t Spod. Batt. eq Other A$m (a) + Royalty = (b) $A/t Spod. Batt. eq Total Non-Curr. Liabil. A$m C2: (a) + depreciation & amortisation = (c) $A/t Spod. Batt. eq Total Liabilities A$m (a) + actual cash for development = (d) $A/t Spod. Batt. eq ,368 2, Net Assets A$m AISC: (c) + Royalty $A/t Spod. Batt. eq Net Debt (net cash) A$m (d) + Royalty $A/t Spod. Batt. eq ,416 2, Price Assumptions Unit Dec 16 Dec 17 Dec 18 Dec 19 Dec 20 Dec 21 Cashflow Unit 31 Dec Dec Dec Dec 20 AUDUSD US$/A$ Operating Cashflow A$m LC US$/t 10,941 12,931 12,672 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$m Hedging Unit Dec 16 Dec 17 Dec 18 Dec 19 Dec 20 Dec 21 Spodumene Property, Plant & Equip. A$m Sensitivity Analysis Exploration and Devel. A$m Valuation FY21 NPAT Other A$m Base Case Investment Activities A$m Spot Prices 3.82 (70.0%) 17.8 (-169.0%) Spot USD/AUD 0.80, Chemical Spod $850/t, LC $14,000/t,Tant. $60/lb. Borrowings A$m AUDUSD +/--10% 1.82 / 2.78 (-19.1% / 23.3%) / (32.9% / -40.2%) Equity or "tbc capital" A$m Spodumene - Technical +/--10% 2.25 / 2.25 (0.0% / 0.0%) / (0.0% / 0.0%) Dividends Paid A$m Spodumene - Chemical +/--10% 2.59 / 1.91 (14.9% / -14.9%) / (-55.7% / 55.7%) Financing Activities A$m Tantalite +/--10% 2.26 / 2.24 (0.4% / -0.4%) / (-2.6% / 2.6%) Production +/--10% 2.87 / 1.63 (27.5% / -27.5%) / (-57.1% / 57.1%) Net Cashflow A$m Operating Costs +/--10% 1.98 / 2.52 (-12.2% / 12.2%) / (35.4% / -35.4%) 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 post merger $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 Other Assets/Exploration Dividend Yield % 0.0% 0.0% 0.0% 0.0% Corporate Overheads Net Debt / Net Debt + Equity% -4218% -330% -13% 51% Net Cash (Debt) Interest Cover X Tax (NPV future liability) Options & Other Equity Return on Equity % 50% 50% 33% 5% Total Yes 0.0 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 27 Jul 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 % % % Tantalite klb % % % Selling Prices Spodumene - Chemical US$/t % % % Tantalite US$/t % % % US$/A$ % % % Net Revenue A$m % % % Total Costs A$m % % % EBITDA A$m % % % - margin 33% 34% 4.4% 52% 46% -11.0% 56% 49% -12.5% Depreciation/Amort A$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 Low Meaningful This appears reasonable based on current resources Ramp-up to 1.6mtpa in CY17 Low Meaningful This seems reasonable given infrastructure in place and recent production figures Capital is required to achieve 70-75% Spodumene prices in line with our estimates Upside/downside Meaningful Hopefully our recovery estimates are too low, and the plant can be optimised quickly to achieve 70% 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 Given the grade of James Bay, and expected capex, our NPV is reasonably immaterial to valuation 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 $2.43 (from $3.25 previously). Price Target Methodology Weighting Spot 12 mth out NPV base case 50% $2.25 $2.47 NPV base case Mt Cattlin only 5% $0.63 $0.69 NPV at spot commodity and fx prices 25% $3.82 $4.27 NPV spod US$450/t, LC US$8,000/t 15% $0.44 $0.59 Net cash 5% $0.07 $0.07 Risk weighted composite $ Months Price Target $2.43 Shareprice - Last - GXY $ mth total return (% to 12mth target + dividend) 30% 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: Shareprice 8.00 Using Hartleys base case commodity forecasts 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: Shareprice Using spot commodity prices 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 Tia Hall 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 Neil Inglis Murray Jacob Gavin Lehmann Shane Lehmann Steven Loxley Andrew Macnaughtan Scott Metcalf David Michael Jamie Moullin Chris Munro Michael Munro Ian Parker Charlie Ransom 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