Galaxy Resources Ltd (GXY)

Transcription

1 Analyst Peter Arden Authorisation Duncan Hughes Recommendation Buy (unchanged) Price $1.835 Valuation $3.35 (unchanged) Risk Speculative Expected Return Capital growth 83% Dividend yield 0% Total expected return 83% Company Data & Ratios Enterprise value $699m Market cap $726m Issued capital 395.8m Free float 87% Avg. daily val. (52wk) $9.0m 12 month price range $ $3.50 GICS sector Price Performance Materials (1m) (3m) (12m) Price (A$) Absolute (%) Rel market (%) Absolute Price $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 Aug 15 Feb 16 Aug 16 Feb 17 Aug 17 SOURCE: IRESS GXY S&P 300 Rebased Speculative See key risks on page 6. Speculative securities may not be suitable for Retail clients. 2 August 2017 Galaxy Resources Ltd (GXY) High grade drilling results at James Bay enhance development potential Infill and extensional drilling underscores scale potential Diamond drilling at the James Bay Project of lithium concentrate producer, GXY has been very successful at confirming and defining more extensive near-surface spodumene-rich pegmatites in close proximity to excellent infrastructure in Quebec, Canada. The current drilling program at James Bay, which is designed to infill, extend and upgrade the quality of the existing substantial lithium resource that currently stands at 22.2Mt at 1.28% Li 2O, has discovered two major new pegmatite dykes in the gap between known pegmatites in the western part of the mineralised system and smaller dyke swarms to the east of the known mineralisation. Several drill holes returned exceptional intersections such as 98.8m at 1.62% Li 2O; 83.19m at 1.56% Li 2O; and 73.9m at 1.50% Li 2O. Intersections outside the current resource at the eastern extremity of the mineralisation were of more typical widths. The lithium mineralisation remains open at depth throughout and to the east of the highway. Mt Cattlin a blueprint to accelerate James Bay development The company continues to ramp up production at its Mt Cattlin mine in WA, where it recently exceeded the nominal plant capacity rate of 160ktpa and is now aiming to make approximately monthly shipments of concentrate. All concentrate shipments are now at the much higher 2017 contract prices of around US$867/t at 5.75% Li 2O with GXY focused on improving recoveries to lower unit operating costs further and provide additional concentrate for sale. GXY has built up considerable development and operating expertise at Mt Cattlin, which is expected to serve as an excellent blueprint for accelerated development of the James Bay Project to take advantage of the strong lithium market conditions expected to apply for producers over the next few years. Investment thesis Spec. Buy, valuation $3.35/sh (unch.) Very positive drilling results bolster the development case for the James Bay Project in Quebec as GXY progresses development of its high quality Sal de Vida brine project in Argentina. We have retained our FY17 to FY19 earnings and our 12-month forward, risk-weighted valuation of $3.35/share is unchanged. Speculative Buy retained. Earnings Forecast Year ending December 2016e 2017e 2018e 2019e Sales (A$m) EBITDA (A$m) (73) NPAT (reported) (A$m) NPAT (adjusted) (A$m) (18) EPS (adjusted) ( ps) (2) EPS growth (%) na na 40% 6% PER (x) na FCF Yield (%) na na na na EV/EBITDA (x) na Dividend ( ps) Yield (%) 0.0% 0.0% 0.0% 0.0% Franking (%) 0% 0% 0% 0% ROE (%) -4% 4% 5% 5% SOURCE: BELL POTTER SECURITIES ESTIMATES BELL POTTER SECURITIES LIMITED ACN AFSL DISCLAIMER AND DISCLOSURES THIS REPORT MUST BE READ WITH THE DISCLAIMER AND DISCLOSURES ON PAGE 8 THAT FORM PART OF IT. Page 1

2 James Bay drilling delivers more pluses Infill and extensional drilling confirms large scale potential Diamond drilling at the James Bay Project of lithium concentrate producer, GXY has been very successful at confirming and defining more extensive near-surface spodumene-rich pegmatites in close proximity to excellent infrastructure in Quebec, Canada. The current drilling program at James Bay, which is designed to infill, extend and upgrade the quality of the existing substantial lithium resource that currently stands at 22.2Mt at 1.28% Li 2O, has been targeting a 1,850m long zone of pegmatite to the west of the James Bay Highway, much of which outcrops at surface (Figure 1 over page). Within known pegmatites, the drilling was Resource-style infill designed to improve and upgrade the resource classification of the existing resource (which comprises Indicated and Inferred categories) to Measured and Indicated categories. The previous drilling was generally restricted to a vertical depth of about 100m but the current drilling program is extending to greater depths and it has discovered two major new pegmatite dykes in the gap between known pegmatites in the western part of the mineralised system and smaller dyke swarms to the east of the known mineralisation. Significant recent intersections included: 32.1m at 1.83% Li2O from 55.45m down hole and 32.4m at 1.43% Li 2O from 177.9m; 98.8m at 1.62% Li 2O from surface; 68.9m at 1.55% Li 2O from 16.15m down hole; 48.2m at 1.91% Li 2O from 127m down hole; 83.19m at 1.56% Li 2O from m down hole in a new pegmatite; 41.58m at 1.87% Li 2O from m down hole; 41.6m at 1.71% Li 2O from 214.6m down hole in a new pegmatite; 53.76m at 1.55% Li 2O from 29.51m down hole; and 73.9m at 1.50% Li 2O from 0.7m down hole. Intersections outside the current resource at the eastern extremity of the mineralisation were of more typical widths. The lithium mineralisation remains open at depth throughout and to the east of the highway (Figures 2 and 3 over page). Mt Cattlin a blueprint to accelerate James Bay development The company continues to ramp up production at its Mt Cattlin mine in WA, where it recently exceeded the nominal plant capacity rate of 160ktpa and is now aiming to make approximately monthly shipments of around 15kt of lithium concentrate at a grade of between 5.7% to 5.8% Li 2O, which seems to be the sweet spot for the refurbished processing plant. All concentrate shipments are now at the much higher 2017 contract prices of around US$867/t at 5.75% Li 2O with GXY focused on improving recoveries towards its targeted level of around 70% to lower unit operating costs further and provide additional concentrate for sale. GXY has built up considerable development and operating expertise at Mt Cattlin, which is expected to serve as an excellent blueprint for accelerated development of the James Bay Project to take advantage of the strong lithium market conditions expected to apply for producers over the next few years. The current drilling program is part of the company s current work on completing an updated Definitive Feasibility Study (DFS), which is expected towards the end of Given the positive drilling results to date, we anticipate that the DFS will be able to show that an even larger development (than the original concept of a plant processing about 1Mtpa of ore) will be indicated for James Bay. As previously indicated by the company, it is also considering some downstream processing of the concentrate to take advantage of the proximity to the North American demand for lithium for New Energy Vehicles (NEVs). Page 2

3 Figure 1 Diamond drilling at James Bay Project showing pegmatite outcrops SOURCE: GALAXY RESOURCES LTD Figure 2 - Long section of James Bay pegmatite swarm with new drilling intercepts of 1-2% Li2O SOURCE: GALAXY RESOURCES LTD Figure 3 - Plan of collar positions of James Bay drilling SOURCE: GALAXY RESOURCES LTD Page 3

4 Earnings and valuations maintained Underlying interim 2017 result still forecast to be around breakeven We have retained our earnings forecasts and we await release of the company s interim 2017 result, which we continue to forecast will be around a breakeven result on an underlying basis, for further information on how the pre-payments under the 2016 contract pricing have been treated. Our valuation, which is based on our fully diluted 12-month forward NPV valuation, is unchanged at $3.35 per share (Table 1). We regard valuation estimates based on risk-weighted NPV-related forecasts as the best guide to the long term value of GXY. Our assumptions for the development of SDV are based on, but are slightly different from, the data presented by GXY in its revised DFS of August We have mostly adopted slightly more cautious assumptions for the project to reflect the experiences (delays in ramp-up and initial costs) of Orocobre with its Olaroz Project (also in northern Argentina). Our assumptions still show that GXY s SDV Project should be a very economically attractive project with high NPV and IRR and relatively short pay-back from low operating costs and an attractive cash operating margin. GXY in strong financial position as expected strong cash inflow starts to impact GXY had net cash of $27.7m at 30 June 2017 and is now in a much stronger financial position as it delivers its lithium concentrate into the much higher priced 2017 contracts. We expect lithium sales to increase significantly in the second half of 2017 now that output has reached the nameplate level, which is expected to generate strong cash inflows at the much higher 2017 contract terms. We have assumed the company does not raise further equity capital in the next year or so as it is expected to be able to build its cash reserves ahead of obtaining suitable debt finance for a potential development of SDV Project (assuming a positive development decision). GXY also owns several minor gold exploration interests, which we have valued at a minor nominal amount. Our valuations are fully diluted to account for all performance rights and options that are in the money at the valuations used (Table 1). Table 1 Fully diluted risk-weighted NPV-based valuations of GXY Assets $m Now +12 months +24 months $ per share 1,2 $m $ per share 1,2 $m $ per share1,2 Mineral Interests Mt Cattlin Sal de Vida James Bay Other Total 1, , , Corporate (39) (0.09) (35) (0.08) (30) (0.07) Enterprise Value 1, , , Net cash/(debt) (256) (0.60) Total 1, , , SOURCE: BELL POTTER SECURITIES ESTIMATES NOTES: 1. MAY NOT ADD BECAUSE OF ROUNDING AND DILUTION EFFECTS. 2. BASED ON FULLY DILUTED SHARE CAPITAL OF 428.1M SHARES THAT INCLUDES ALL PERFORMANCE RIGHTS AND OPTIONS THAT ARE IN THE MONEY AT THE ABOVE VALUATIONS 3. INCLUDES EFFECT OF OPTIONS EXERCISE Page 4

5 Galaxy Resources Limited (GXY) Company description GXY is a Perth based lithium production company with an experienced management team that has a track record of successful involvement across the whole spectrum of lithium sector activities ranging from exploration and development of deposits to spodumene production, feasibility studies on a major lithium brine project and also previously with the production of high quality lithium end products in China. GXY s assets comprise three wholly owned major lithium production and development projects the Mt Cattlin spodumene mining and processing operation in the Ravensthorpe district of WA; the flagship project is to be the Sal de Vida Project, which is a planned major new lithium brine development in the Catamarca region of Argentina; and the James Bay Project is an advanced spodumene deposit in the Quebec region of Canada, which is the subject of a resumed Feasibility Study. Mt Cattlin has been expanded to become one of the largest spodumene producers with ore processing capacity of 1.6Mtpa that is expected to yield around 215ktpa of spodumene concentrate and about 43tpa of tantalum concentrate when production reaches targeted levels following a period of ramp-up after resumption of operations in late A recently completed revised DFS of the Sal de Vida Project showed that it is capable of becoming a major low cost lithium carbonate producer based on very extensive lithium brine resources and reserves that include by-product potash (KCl) and which could be in production by about mid Sal de Vida is capable of becoming a long life operation producing around 25ktpa of high quality lithium carbonate for the battery market along with around 95ktpa of potash. The James Bay Project has a significant lithium resource in the form of spodumene that is currently being actively evaluated as part of the updating of the previous feasibility studies as a potential significant North American source of lithium supply as spodumene and potentially a battery grade downstream product for local markets. Investment Thesis Speculative Buy, Valn. $3.35/sh (unch.) Very positive drilling results bolster the development case for the James Bay Project in Quebec as GXY progresses development of its high quality Sal de Vida brine project in Argentina. We have retained our FY17 to FY19 earnings and our 12-month forward, riskweighted valuation of $3.35/share is unchanged. Speculative Buy retained. Valuation: Assessed at $3.35 per share (unchanged) Our valuation of GXY is based on the 12-month forward risk-weighted DCF-based valuations of the Mt Cattlin operation and the potential development of significant lithium carbonate and potash production from the Sal de Vida Brine Project beginning in about FY19 and a potential open pit operation at the James Bay Project. Our valuations have assumed the company can generate significant free cash flow from Mt Cattlin and therefore does not need to have a further equity raising in the next year or so to assist with the expected funding then for the development of the Sal de Vida Project and potential development of the James Bay Project, which could also both be funded in part by appropriate sell downs to strategic partners. Page 5

6 Risks of investment The key risks for resources investments include, but are not limited to: Commodity price volatility: Unlike the well-developed and extensive markets for gold and base metals, there are no formal terminal markets for lithium or lithium products. The pricing for lithium products is almost exclusively determined by private negotiation between producer and end user, in contrast to most other mineral and metallic commodities. As with most mineral commodity prices, prices for lithium products are generally denominated in US dollars, so their translation into Australian dollars can be affected by wide fluctuations in the value of the Australian dollar. Commodity price and foreign exchange rate outcomes may be different from our forecasts. Lack of funding: While GXY has resumed lithium production at Mt Cattlin at a time of strong lithium prices, which should see the company generating strong operating cash flows when that operation reaches its targeted production rate, GXY s development projects will require significant additional funding, much of which could be expected to come from debt funding. Access to adequate debt and equity funding will be required for these developing operations until they reach the stage where they are self-funding. Adverse changes to business conditions from changed government policy: While GXY s current operations are in the very politically and socially stable jurisdiction of WA, where there are very well-known and accepted and transparent legal and regulatory frameworks that support mineral exploration, mining and processing, the company s pursuit of additional lithium production involves international jurisdictions. Changes to business conditions and government policies even in Australian jurisdictions, can occur and may have an adverse impact on the effectiveness of, and returns from, GXY s operations. Various stages of the routine regulatory approvals process and interaction with local communities around mining operations can sometimes suffer unforeseen delays that may result in adverse financial outcomes. Metallurgical issues: While the metallurgical recovery of hard rock lithium (spodumene) is based on relatively straight forward gravity techniques, the achievement of relatively high recoveries of lithium and associated by-products requires achieving a careful calibration of several metallurgical processes. Similarly, while the recovery of lithium from brines is relatively well understood and equipment for such plants is generally available off the shelf and the testwork on SDV Project as disclosed in the two DFSs indicates acceptably high recoveries can be achieved, there may be an additional need to modify the recovery attributes of the mineralisation to be treated at SDV and any future mineralisation discovered by the company at its projects. Lack of exploration success: While lithium mineralisation is not as rare as many other mineral commodities, and GXY has already successfully identified very significant Mineral Resources and Reserves, it is quite rare to find lithium in commercial quantities. As with other mineral deposits, geological complexities may arise with lithium deposits including extensive local and complex structural faulting and dislocation and mineralising overprints that may require extensive drilling programs to resolve, the resolution of which may inhibit the future definition of adequate resources and reserves. Weather impacts: GXY s projects are located in areas that can have severe weather events, which may adversely impact the company s operations at times. The company is planning to develop a brine-based operation at significant altitude in Argentina which relies on evaporation and so it may be adversely affected by climatic events. Inappropriate acquisitions: The acquisition of other assets can divert management effort from the current focus and may yield inadequate returns. Page 6

7 Galaxy Resources Ltd as at 2 August 2017 Recommendation Buy, Speculative Price $1.835 Valuation $3.35 Galaxy Resources Ltd (GXY) 2 August 2017 Table 2 - Financial summary PROFIT AND LOSS SOURCE: BELL POTTER SECURITIES ESTIMATES FINANCIAL RATIOS Year ending 31 December Unit 2015a 2016a 2017e 2018e 2019e Year ending 31 December Unit 2015a 2016a 2017e 2018e 2019e Revenue $m VALUATION Operating expenses $m (9) (73) (88) (108) (143) NPAT (adjusted) $m (16) (18) EBITDA $m (9) (73) Adjusted EPS c/sh (1) (2) Depreciation and amortisation $m (0) (6) (10) (11) (45) EPS growth % na na na 40% 6% EBIT $m (9) (79) PER x na na 44x 31x 29x Net interest $m (7) (3) (4) (27) (39) DPS c/sh PBT $m (17) (82) Franking % 0% 0% 0% 0% 0% Tax expense $m - 65 (8) (11) (12) Yield % 0% 0% 0% 0% 0% Impairments/write-offs/other $m FCF/share c/sh (2) (2) (11) (71) (4) Minority interest $m 1 (0) FCF yield % na na na na na NPAT (reported) $m EV/EBITDA x na na 18.7x 10.0x 6.0x Abnormal items $m (58) (140) PROFITABILITY RATIOS NPAT (adjusted) $m (16) (18) EBITDA margin % na na 29% 40% 46% EBIT margin % na na 22% 34% 29% PROFIT AND LOSS (INTERIM) Return on assets % -11% -3% 2% 2% 2% Half year ending Unit Jun-15a Dec-15a Jun-16a Dec-16a Jun-17e Return on equity % -15% -4% 4% 5% 5% Revenue $m LIQUIDITY & LEVERAGE Expense $m (10) 1 (4) (70) (41) Net debt / (cash) $m EBITDA $m (10) 1 (4) (70) 7 ND / E % 23% 7% 3% 59% 62% Depreciation $m (0) (0) (0) (6) (4) ND / (ND + E) % 19% 6% 3% 37% 38% EBIT $m (10) 1 (4) (75) 3 Net interest expense $m (6) (2) (2) (1) (2) ASSUMPTIONS - Prices PBT and minorities $m (16) (1) (6) (77) 1 Year ending 31 December Unit 2015a 2016a 2017e 2018e LT real Tax (expense)/benefit $m (1) Spodumene concentrate US$/t Impairments/write-offs/other $m 65 (5) Lithium carbonate US$/t 6,000 9,500 9,975 10,723 9,750 NPAT (reported) $m 49 (6) Tantalum concentrate US$/kg Abnormal items $m (64) 6 (75) (65) - Potash (MOP) US$/t NPAT (adjusted) $m (15) (0) (5) (12) 0 CURRENCY CASH FLOW USD/AUD US$/A$ Year ending 31 December Unit 2015a 2016a 2017e 2018e 2019e ASSUMPTIONS - Mineral Resources OPERATING CASHFLOW Project and Resource Categories Mt Li2O % Ta 2 O 5 ppm Li2O kt Ta2O5 kt KCl Mt Receipts $m Mt Cattlin (Measured, Indicated and Inferred) Payments $m (10) (7) (93) (121) (155) Sal de Vida (Measured, Indicated and Inferred) 2, Tax $m James Bay (Indicated and Inferred) Net interest $m (13) (5) (1) (2) (17) Total (Measured, Indicated and Inferred) 3, Other $m Operating cash flow $m (20) (2) ASSUMPTIONS - Production (equity %) INVESTING CASHFLOW Year ending 31 December Unit 2015a 2016a 2017e 2018e 2019e Capex and exploration $m (2) (22) (77) (340) (113) Mt Cattlin Other $m 47 7 (0) (19) (16) Metallurgical recovery rates % 45% 55% 65% 69% Investing cash flow $m 45 (15) (77) (359) (128) Spodumene concentrate kt FINANCING CASHFLOW Average Li2O content % na 5.8% 5.8% 5.8% Net equity proceeds $m (0) Tantalum concentrate t Debt proceeds/(repayments) $m (37) Spodumene all in sustaining costs (after by-prods) A$/t 1, Dividends $m Spodumene all in sustaining costs (after by-prods) US$/t Other $m Sal de Vida Financing cash flow $m (37) Lithium carbonate kt 4 Change in cash $m (12) 5 67 (9) (2) Potash (MOP) kt - BALANCE SHEET Year ending 31 December Unit 2015a 2016a 2017e 2018e 2019e ISSUED CAPITAL AND VALUATION All in sustaining costs (after by products) US$/t 4,694 ASSETS Issued capital Unit Cash & short term investments $m Ordinary shares m Accounts receivable $m Options, performance rights, exchangeable and special voting shares m 32.2 Inventory $m Total m Mine development and PPE $m Exploration & evaluation $m Now + 12 months + 24 months Other $m Sum of parts valuation $m $/sh 1 $m $/sh 1 $m $/sh 1 Total assets $m ,061 1,142 Lithium projects - Mt Cattlin LIABILITIES - Sal de Vida Accounts payable $m James Bay Borrowings $m Other exploration Other $m Total projects 1, , , Total liabilities $m Corporate (39) (0.09) (35) (0.08) (30) (0.07) SHAREHOLDER'S EQUITY Enterprise value 1, , , Share capital $m Net Cash/(Debt) including asumed equity, opts exe (250) (0.58) Reserves $m (7) Equity value 1, , , Retained earnings $m (354) (226) (208) (183) (156) Non-controlling interest $m SUBSTANTIAL AND SIGNIFICANT SHAREHOLDERS Total equity $m Shareholder M Shares Interest BlackRock Group % Weighted average shares m 1,103 1, Paradice Investment Management % Board and Management % Note 1. May not add due to rounding and dilution effects; based on total diluting shares of 428.1m Page 7

8 Recommendation structure Buy: Expect >15% total return on a 12 month view. For stocks regarded as Speculative a return of >30% is expected. Research Team Staff Member TS Lim Sam Haddad Tim Piper Title/Sector Head of Research Phone tslim shaddad tpiper Hold: Expect total return between -5% Chris Savage csavage and 15% on a 12 month view Jonathan Snape jsnape Sell: Expect <-5% total return on a 12 month view John Hester Tanushree Jain Financials Healthcare Healthcare/Biotech jhester tnjain Speculative Investments are either start-up enterprises with nil or only prospective operations or recently commenced operations with only forecast cash flows, or companies that have commenced operations or have been in operation for some time but have only forecast cash flows and/or a stressed balance sheet. Such investments may carry an TS Lim Lafitani Sotiriou Resources Peter Arden David Coates Duncan Hughes Associates James Filius Alex McLean Banks/Regionals Diversified Resources Resources Resources Research Associate Research Associate tslim lsotiriou parden dcoates dhughes jfilius amclean exceptionally high level of capital risk and volatility of returns. Bell Potter Securities Limited ACN Level 38, Aurora Place 88 Phillip Street, Sydney 2000 Telephone The following may affect your legal rights. Important Disclaimer: This document is a private communication to clients and is not intended for public circulation or for the use of any third party, without the prior approval of Bell Potter Securities Limited. In the USA and the UK this research is only for institutional investors. It is not for release, publication or distribution in whole or in part to any persons in the two specified countries. In Hong Kong this research is being distributed by Bell Potter Securities (HK) Limited which is licensed and regulated by the Securities and Futures Commission, Hong Kong. This is general investment advice only and does not constitute personal advice to any person. Because this document has been prepared without consideration of any specific client s financial situation, particular needs and investment objectives ( relevant personal circumstances ), a Bell Potter Securities Limited investment adviser (or the financial services licensee, or the representative of such licensee, who has provided you with this report by arraignment with Bell Potter Securities Limited) should be made aware of your relevant personal circumstances and consulted before any investment decision is made on the basis of this document. While this document is based on information from sources which are considered reliable, Bell Potter Securities Limited has not verified independently the information contained in the document and Bell Potter Securities Limited and its directors, employees and consultants do not represent, warrant or guarantee, expressly or impliedly, that the information contained in this document is complete or accurate. Nor does Bell Potter Securities Limited accept any responsibility for updating any advice, views opinions, or recommendations contained in this document or for correcting any error or omission which may become apparent after the document has been issued. Except insofar as liability under any statute cannot be excluded. Bell Potter Limited and its directors, employees and consultants do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this document or any other person. Disclosure of interest: Bell Potter Securities Limited, its employees, consultants and its associates within the meaning of Chapter 7 of the Corporations Law may receive commissions, underwriting and management fees from transactions involving securities referred to in this document (which its representatives may directly share) and may from time to time hold interests in the securities referred to in this document. Peter Arden owns shares in GXY. Speculative Risk Warning: The stocks of companies without revenue streams from product sales or ongoing service revenue should always be regarded as speculative in character. Stocks with Speculative designation are prone to high volatility in share price movements. In the case of Speculative Resource companies, the additional risks include but are not limited to Government approvals and permitting, mine and infrastructure development, commodity price and exchange rate fluctuations, resource growth and mine life extensions and regulatory and sovereign risks. Investors are advised to be cognisant of these risks before buying such a stock including Galaxy Resources Ltd (of which a list of specific risks is highlighted within). ANALYST CERTIFICATION Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner; (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report; and (3) the analyst responsible for this report holds an interest in 10,000 shares in the securities of Galaxy Resources Limited at the date of this report. Page 8