Galaxy Resources Limited

Transcription

1 Galaxy Resources Limited (Ticker: ASX:GXY) Equity Research and Market Intelligence April 14, 2015 Price (A$): (April 14, 2015) Beta: NA Price/Book Ratio: 0.46 Debt/Equity Ratio: 2.60 Listed Exchange: May Apr Jul Jun-14 ASX *Company is compared to the S&P/ASX 200 resources index. Source: Bloomberg. Recent News 15-Aug Oct Sep-14 4/14/2015: Galaxy Resources announced that the Jiangsu transaction has been completed And it has received the proceeds from Tianqi. The transaction has left the Company with a cash position of A$50 million. 3/31/2015: The voluntary suspension of shares trading was lifted on 31 March 2015 and the Company recommenced trading. 3/18/2015: Galaxy Resources confirmed that shareholders of both Galaxy and Tianqi have approved the revised agreement for sale of the Jiangsu plant to Tianqi. 2/9/2015: Galaxy Resources enters into an agreement with General Mining Corp granting it the rights to operate the Mt Cattlin project for a lease of A$2.5M p.a. and 10% production royalty. 2/2/2015: The Company revised the sale consideration of the share purchase agreement with Tianqi to US$173.2M from US$230M with cash consideration of US$71.7M and assumption of $101.5M of Chinese debt. 10/23/2014: Galaxy completed all instalments for deferred land purchases for Sal De Vida with a final payment of US$2.5M. Galaxy now fully owns 100% of all tenements necessary for both production wells and surface evaporation. Shares in Issue: B Market Cap: A$34.07 M 15-Dec Nov Week Range (Low-High): A$ A$ Jan Mar Feb-15 S&P/ASX 200 RESOURCES (RHS) GXY 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Jiangsu transaction transforms Galaxy to a position of financial strength Galaxy Resources Limited ( Galaxy or the Company ) is a global lithium company with hard rock lithium mines and brine assets in Australia, Canada and Argentina. The Company is an integrated lithium mining and chemicals company listed on the Australian Securities Exchange (Code: GXY). The Company recently sold its operating asset in China, the Jiangsu Lithium Carbonate Plant to Sichuan Tianqi Lithium Industries Inc. ( Tianqi ) for an enterprise value of US$173.2 million. This has significantly improved the Company s balance sheet and provides it with considerable financial muscle to advance its Sal de Vida lithium and potash project in Argentina. Investment Arguments Jiangsu transaction transforms the Company s balance sheet: The sale of the Jiangsu plant has transformed the Company s balance sheet and provides Galaxy the financial strength required to focus on the development of its Sal de Vida lithium brine and potash project in Argentina as its key strategic asset. Sal de Vida has huge potential. The Sal de Vida lithium-potash brine project, a flagship development project of Galaxy Resources acquired in July 2012, via the acquisition of the then TSX-listed Lithium One, has a design capacity to support annual production of 25,000 tons per annum ( tpa ) of battery grade lithium carbonate and 95,000 tpa of fertilizer grade potash over a 40 year mine life. The brine based production provides the Company with extraction at very low costs, almost half of that under the spodumene mining method. According to the Definitive Feasibility Study ( DFS ), which was completed in April 2013, the project is valued at a pre-tax net present value of US$645 million (or US$380 million post-tax) at a 10% discount rate. Galaxy has advanced the development of Sal de Vida and applied some of the same processes and technologies that have proven successful at the Jiangsu plant. This project has the potential to transform Galaxy among the top five global lithium producers. Battery led exponential demand forecast for lithium. The demand for lithium-ion batteries is expected to rise exponentially on the back of higher demand for electric vehicles. It is currently used in almost all portable electric devices including cell phone and computer batteries with items such as shavers, power tools, and hybrid and electric cars switching over from other battery technologies. The growth for the small battery market, which is comprised of calculators, computers, cameras, communications devices, phones, etc., is forecasted to grow by 10% per annum ( p.a. ) until The emerging large battery market is expected considerably higher growth at 28% p.a. from 2017 to 2020 for the emerging large format battery market for electric bicycles, hybrid and all electric vehicles, as well as mass energy storage systems. Further, the Centre for Solar Energy and Hydrogen Research recently stated that the demand for electric vehicles is growing rapidly with more than 320,000 new electric vehicle registrations in This brought the total global market up to 740,000 vehicles. Battery suppliers have benefitted robustly as their combined revenue reached US$2.17 billion in 2014.

2 Mt Cattlin executes agreement with Strategic Partner. Galaxy has recently entered into a lease agreement with General Mining Corporation ( General Mining ) for its Mt Cattlin project. Mt Cattlin provided Galaxy Resources much needed control over the supply chain by providing a secure supply of raw materials for the production of lithium carbonate at the Jiangsu plant. Production at Mt Cattlin had been placed on care and maintenance, subsequent to the switchover to Talison feedstock and with the divestment to Tianqi, it is no longer providing spodumene raw material to Jiangsu. However, following the sale of the Jiangsu project, Galaxy continued to look for ways to extract value from this project. Per the agreement, General Mining will have sole operational rights on the Mt Cattlin project for a three year period for an annual lease fee of A$2.5 million along with a 10% production royalty. The agreement also provides an option to General Mining to purchase the project for US$30 million plus a 3% net smelter return. General Mining is expected to enter into production within 6-months providing Galaxy with near term cash flows as it focuses on its flagship Sal de Vida project. Company Overview Galaxy Resources is a special chemical company listed on the Australian Stock Exchange. It is a leading vertically integrated lithium mining and chemicals company with hard rock lithium mines and brine assets in Australia, Canada and Argentina. In 2012, Galaxy merged with TSX-listed lithium exploration company Lithium One. The merger boosted Galaxy's global lithium resource base and allowed the Company to enter the Latin American market, by acquiring Lithium One s Sal de Vida lithium and Potash Brine project in Argentina. Galaxy Resources is based in Australia, it listed on the Australian Stock Exchange in 2007 and trades under the symbol GXY. Galaxy is currently focused on developing the Sal de Vida Lithium and Potash Brine project ( Sal de Vida ) in Argentina, which is situated in the Lithium Triangle. This region is where Chile, Argentina and Bolivia meet and roughly accounts for 60% of the global lithium production. Sal de Vida is a proven high quality resource for the Company with a potential future for low cost production. The Company also owns the Mt Cattlin Spodumene Mine near Ravensthorpe in Western Australia and the James Bay Lithium Pegmatite Project in Quebec, Canada. Lithium compounds are widely used in the manufacture of a wide variety of products like ceramics, glass, and electronics. More in particular, lithium compounds are an essential cathode material used in the manufacturing of long life lithium-ion batteries which are used to power e-bikes, and hybrid and electric vehicles. Galaxy foresees a strong global demand for lithium and is aiming to become a market leader in the global lithium industry with its highly low cost project, Sal de Vida. Since 2013 the Company has completed numerous critical initiatives in financial and operating restructuring. These include raising US$37.5 million under an entitlement offer, converting US$1.5 million of convertible debt into equity, extending the maturity of the remaining convertible debt from November 2013 to November 2015, and restructuring close to US$60 million of Chinese bank debt, as well as other cost cutting initiatives. With the recently announced sale of the Jiangsu plant in China, Tianqi be assuming US$101.5 million of the outstanding Chinese debt thus further strengthening the Company s balance sheet. Post these measures the Company has emerged with a stronger balance sheet and a strategic focus on its high potential flagship project, Sal de Vida. Galaxy plans to acquire new strategic assets to improve its market position. 2

3 Key Projects Galaxy Resources current portfolio is comprised of lithium assets including 96% owned Sal de Vida, 100% owned Mt Cattlin in Western Australia and 100% owned James Bay in Canada. With the sale of the Company s Jiangsu Plant, Galaxy is now able to focus on advancing its flagship project in Argentina, Sal de Vida. Galaxy has solidified a strategic partnership with General Mining Corporation on its Mt Cattlin project and is looking for strategic options to unlock value for its James Bay project. Exhibit 1: Overview of Key Projects Source: Company Presentation Sal De Vida - Argentina Sal de Vida, which means the Salt of Life, is the Company s flagship project, and is one of the world s largest and highest quality undeveloped lithium brine deposits with significant expansion potential. The project is located in north-west Argentina, known as the Lithium Triangle, which produces more than 60% of the world's annual production of lithium from brines in the Salar de Atacama and the Salar del Hombre Muerto. The Salar is situated approximately 1,400 kilometers north-west of Buenos Aires at an altitude of 4,025 meters. The property has good connectivity with the city of Salta via, an all-seasons road, and has a major power line 115 kilometers away. Exhibit 2: The Lithium Triangle Source: Company Website 3

4 Sal de Vida s brine chemistry is highly favorable with high levels of lithium and potash, and low levels of impurities like magnesium and sulphide. Galaxy has advanced the development of Sal de Vida, employing, where applicable, some of the same processes and technologies that have proven successful at the Jiangsu Plant. The DFS estimates a pre-tax net present value of US$645 million (or US$380 million post-tax) at a 10% discount rate. Sal de Vida has the potential to generate total annual revenues in the region of US$215 million and operating cash flows before interest and tax of US$118 million per annum when operated at full production capacity. Additionally, the netback from potash production increases the project profitability due to lower cost of production of lithium carbonate. Average operating costs have been estimated at US$2,200 per ton (net of potash credits) of battery grade lithium carbonate. The total capital cost for Sal de Vida is estimated at US$369.2 million. A recently-announced maiden JORC-compliant reserve estimate of 1.1 million tons of retrievable lithium carbonate equivalent and 4.2 million tons of potassium chloride (potash or KCI) equivalent supports annual production of 25,000 tons of battery grade lithium carbonate and 95,000 tons of fertilizer grade potash over a 40 year period. The DFS has been modeled on an operation with production at these levels. The DFS supports the development of the project, which will include evaporation ponds, a battery grade lithium carbonate plant and a potash plan. Exhibit 3: Probable and Proven Reserve Statement (April 2013) Reserve Category Time Period (Years) Tons Li Total Mass Tons Equivalent Li2CO3 Tons K Total Mass Tons Equivalent KCl Proven , , , ,000 Probable , ,000 1,869,000 3,564,000 Total 40 years total 214,000 1,139,000 2,201,000 4,197,00 Note: Assumes 500 mg/l Li cut off Source: Company Filings Galaxy owns 96% of the project through a JV with the remaining 4% held by a Korean Consortium, including KORES, LG International and GS Energy. Galaxy has now completed all installments for deferred land purchases for Sal De Vida during With a final payment of US$2.5million in August 2014, the Company now fully owns 100% of all tenements necessary for both production wells and surface evaporation. Only one property, which is not in the reserve area or production area, has a royalty agreement with the former owners, and this property will not result in any financial liabilities to third parties. Galaxy owns all its tenements and does not lease them. Further, the company has full permitting approvals on both provinces. After the potash net-back, the estimated average operating cost per ton of battery grade lithium carbonate is US$2,200 per ton. Of this, 42% is accounted for by reagent costs such as soda ash, lime and various process reagents, labor (15%), transport costs (16%) and power generation (7%) are among the other major operating costs. The project development is planned in two phases - with Phase I of up to 10,000 tpa LC production capacity and Phase II taking the project to 25,000 tpa. 4

5 Exhibit 4: Probable and Proven Reserve Statement April 2013 Previous DFS (April 2013) Lithium carbonate production (tpa) Target DFC revisions for Phase 1 25,000 6,000-10,000 Potash production (tpa) 95,000 TBA Estimated capital costs ($M) Estimated operating costs ($/t Li2CO3) 2,200 TBA Source: Company Presentation The initial total capital costs for the Sal de Vida project are estimated at US$369.2 million. This is made up of direct costs of US$275.6 million, indirect costs of US$60.0 million and contingency of US$33.5 million. The estimated capital costs for Phase I are in the range of US$ million assuming a 70:30 Debt:Equity financing, project scale and financing manageable, equity component covered by future cash. Galaxy will be utilizing its proprietary technology at Sal de Vida, which it developed through the build-out of the Jiangsu Plant, to upgrade the lithium carbonate s purity to battery grade (99.5% purity or higher), making it usable by battery material manufacturers for the manufacture of lithium-ion batteries. Due to its high value application, battery grade lithium carbonate receives a price premium to technical grades. Jiangsu Battery Plant China (Sold) On 13 April 2015, Galaxy and Tianqi were pleased to announce the closing transaction of Galaxy Lithium International Limited, the entity which holds the Jiangsu Lithium Carbonate Plant based in China. The sale resulted in an enterprise value of US$173.2 million with a cash consideration of US$71.7 million along with Tianqi assuming the whole portion of the Chinese bank debt held under the Jiangsu asset. On 28 July 2014, Galaxy, through its wholly-owned subsidiary Galaxy Lithium Australia Limited ( GLAL ) entered into an agreement ( Contingent Loan Agreement ) with Tianqi Group HK Co. Limited ( Tianqi HK ) for the provision by Tianqi HK to GLAL of a "US$30 million "non-amortizing bullet term loan facility (Loan Facility). On 8 August 2014, GLAL drew down US$15million under the Loan Facility and drew down the remaining US$15 million in September Under the Contingent Loan Agreement, which served as an advance of transaction funds, interest accrues on the outstanding amount of the Loan Facility at a rate of 10% per annum, of which the first 3 months interest is payable in advance. All outstanding amounts (including all accrued and outstanding interest) is repayable on the date of completion which occurs under the share purchase agreement ( SPA ) in relation to the sale of GXY s wholly-owned subsidiary, Galaxy Lithium International Limited ( GLIL ), the parent entity of Galaxy Jiangsu. GLAL was to repay the Loan Facility by off-setting the outstanding amounts against the consideration received from the sale of GLIL upon completion under the SPA. The Loan Facility was guaranteed by GLIL and was secured by all of the shares in, and assets held by GLIL. However, in February 2015, due to continued delays in receiving government approvals, Tianqi revised the purchase consideration in the SPA. As per the revised agreement the sale consideration has been revised from US$230 million to US$173.2 million (payable through cash of US$71.7 million and Tianqi assuming the complete outstanding Chinese bank debt of US$101.5 million). The Jiangsu plant depleted the Mt Cattlin spodumene in mid-november 2013 and carried out a scheduled and required shutdown to convert the calcination system to 5

6 accommodate the Talison feedstock. Jiangsu plant received its first shipment of Talison feedstock in early December 2013 and production resumed in mid-december With almost one month of production impacted by the changeover, the total production volume recorded for the period was lower than guidance. This impacted the strategic plan of Jiangsu reaching cash flow breakeven status by the end of However, individual run rate periods once Jiangsu was recommissioned were encouraging. Exhibit 5: Operational Performance - Jiangsu Plant Lithium Carbonate Production Production (tons) 5,844 1,454 Sales (tons) 5,630 1,329 Source: Company Presentation Mt Cattlin Western Australia Mt Cattlin spodumene project is located two kilometers north of the town of Ravensthorpe in Western Australia. In July 2012, Galaxy stopped its operations at Mt Cattlin as the production costs were not profitable. This also helped the company to focus on production at the Jiangsu plant. Spodumene feedstock sourcing for the Jiangsu plant was done through another lithium company, Talison Lithium. Previously, Galaxy was mining pegmatite ore at Mt Cattlin, which was processed on site to produce a spodumene concentrate and a tantalum by product. At full capacity, ore could be processed at a rate of one million tpa with lithium oxide concentrate production of 137,000 tpa and 56,000 pounds (lbs) p.a. of contained tantalum (TA 2O 5). Galaxy Resources holds a series of tenements surrounding and including the mining lease M74/12, which contains the majority of the spodumene (LiAlSi 20 6) resource identified to date and which hosts the Mt Cattlin mine. In a resource estimate issued in March 2011, Mt Cattlin s total contained lithium oxide (Li 2O) resource was 197,000 tons, the measured and indicated resource was 13.8 million tons and total resource ore tons were million. Exhibit 6: Mt Cattlin Location Map Source: Company Presentation 6

7 The current life potential of the Mt Cattlin mine is 18 years, including inferred resources. The Mt Cattlin mine operations include open-pit mining of a flat lying pegmatite ore body. The flat lying nature of the ore body allows mining to proceed at a constant strip ratio once the ore is uncovered. Mining is carried out using excavator and truck operations, delivering to a conventional crushing and HMS gravity recovery circuit. Contract mining is used for grade control drilling and earthmoving operations (drilling, blasting, load, haul and ancillary work) for the open-cut mining operation. The pit design encompasses existing measured and indicated resources and has been defined as the Dowling pit. In order to keep the project in good standing condition, the Company has undertaken the necessary activities. In February 2015, Galaxy entered into a new lease agreement allowing General Mining the sole rights to operate the Mt Cattlin project for an annual lease fee of A$2.5 million and a 10% production royalty for three years. The agreement provides General Mining with an option to purchase the project for A$30 million plus a 3% net smelter return anytime within the three year period. James Bay - Quebec, Canada The James Bay project is located in northwest Quebec, two kilometers south of the Eastmain River and 100 kilometers east of James Bay. The project contains indicated resources of million tons grading at 1.30% Li 2O and inferred resources of 10.47mt grading at 1.20% Li 2O. The James Bay deposit occurs at surface and resource modeling indicates that the resource is amenable to open pit extraction. There is excellent potential to increase the resources through additional delineation of the pegmatite dykes along strike and at depth and potential to increase grade through infill drilling. All operations necessary to keep the project in running condition are maintained. Exhibit 7: James Bay - Resource Resource Tons Li 2O% Indicated 11,750, Inferred 10,470, TOTAL 22,220, Source: Company Website Industry Overview Lithium is the lightest metal and least dense solid element available on earth. The white metal is always found in compounds due to its highly reactive nature. Lithium occurs in a number of pegmatitic minerals but is generally obtained from brines and clays. Commercial grade lithium is isolated electrolytically from a mixture of lithium chloride and potassium chloride. Lithium and its compounds are applied in heat-resistant glass and ceramics, greases, high strength-to-weight alloys and lithium batteries, among others. Lithium is best suited for batteries of portable consumer electronics such as mobile phones and laptop computers due to its higher storage capacity and light weight. Lithium is also used in nuclear and photoelectric industries. Future demand for lithium would be driven by growth in the above industries; however demand would be largely driven by increasing demand for lithium-ion batteries from the auto sector for electronic and hybrid electric vehicles. The Puna Plateau of Argentina and Chile accounts for over 80% of world s lithium production and has the largest concentration of economic salars in the world. Salar is the Spanish term for salt flats, 7

8 which are generally the remnants of historic bodies of water, such as lakes or rivers, or of temporary and seasonal lakebeds. Lithium is typically sourced either from hard rock spodumene mines or from salt lakes and used as technical grade or high value battery grade. Chemical grade lithium carbonate receives a price premium to technical grades, due to their high value appreciation. Exhibit 8: Sources and End-uses of Lithium Source: Roskill Lithium Demand Demand for lithium is largely driven by its usage in manufacturing ceramics/glass and batteries for electric cars, which is emerging as the most prominent and fast growing market. Lithium is also used in manufacturing batteries used to power appliances such as cell phones, cameras, portable computers and others. Other uses of lithium include air conditioning, biotechnology, carbon dioxide absorption, use as an additive to construction materials such as cements to make them stronger and faster setting, ceramics, glass, enamel, humidity control, industrial catalysts, lubricating greases, aluminum manufacture organic synthesis, pharmaceuticals, thermal heat storage, the rubber industry, welding and brazing, zerolites, and many more. According to Roskill, lithium carbonate was the most widely used lithium chemical, representing approximately 48% of the total global consumption of lithium chemicals in 2013 (25% technical-grade lithium carbonate and 23% battery-grade lithium carbonate). Lithium hydroxide was the second-most used lithium chemical representing 16% of total global consumption. Lithium bromide, lithium chloride and lithium minerals are the other commonly consumed lithium compounds. Exhibit 9: Uses of Lithium by end use (2012) 16% Ceramics 2% 2% 3% 4% 5% 12% 27% 29% Batteries Grease Castings Air treatment Polymers Aluminium Drugs Other Source: USGS 8

9 According to Roskill, rechargeable batteries accounted for the largest global consumption of lithium was recorded at 27% in 2012, up from just 8% in Global demand for lithium has increased at 10% annually since 2010 and is expected to continue to increase by 11% annually until 2017 to reach slightly over 238,000 tons of lithium carbonate equivalent (t LCE). 44% of the net increase in lithium consumption over the last ten years and 70% over the last five years have been driven by rechargeable batteries. According to Roskill, total demand for lithium is expected to reach slightly over 238,000t LCE by 2017, with rechargeable batteries accounting for 75% of the growth. Exhibit 10: Global Consumption of Lithium by End-use, (t LCE) Source: Roskill Demand from other end-uses like glass-ceramics, greases and polymers, which have historically had high growth rates are predicted to stabilize over the next five years with slowing emerging economies. Thus, the lithium industry is becoming more reliant on rechargeable batteries to sustain high rates of future demand growth. Roskill forecasts that the main market driver for lithium-ion batteries will gradually switch from portable consumer electronics to electric vehicles, especially hybrid variants from Exhibit 11: Lithium Demand CAGR (2020/2011) Lithium carbonate 68,445 95, ,743 9% Lithium hydroxide 25,824 49,889 99,297 16% Lithium concentrate 19,229 25,683 31,393 6% Other lithium compounds 26,557 34,092 47,310 7% Total 140, , ,743 10% Source: SignumBOX Geographically, the East Asia region has become an increasingly important consumer of lithium products over the last decade, mainly due to the concentration of lithium-ion battery manufacturers and associated cathode material producers in China, Japan and South Korea. In 2012, East Asia accounted for 60% of total global lithium consumption with Europe accounting for a further 24% and North America at 9%. Demand in emerging markets is primarily driven by China and India with increasing demand for electronic goods and vehicles. Moreover, supported by the Chinese government, the country provides an attractive investment environment for automakers, 9

10 which are partnering with Chinese manufacturers. Lithium battery production in China increased from units worth US$2.1 billion in 2007 to units worth US$5.4 billion in 2011 and demand for lithium-ion batteries is expected to reach nearly US$9.2 billion by Further, the Centre for Solar Energy and Hydrogen Research recently stated that the demand for electric vehicles is growing rapidly with more than 320,000 new EV registrations in This brought the total global market up to 740,000 vehicles. Battery suppliers have benefitted robustly as their combined revenue reached $2.17 billion in The US has led this growth with total EV registrations reaching 290,000 in 2014, almost 40% of the global market. The US EV market has grown 69% while China is also matching up with a growth rate of 120% in 2014 with 54,000 new registrations in While the total number of EV vehicles reached ~100,000 in China, Japan had a total of ~110,000 EVs in the country. Lithium Supply Lithium is the 33rd most frequently occurring mineral and is commonly found on the earth s surface. Due to its highly reactive nature, lithium is found as a compound and needs chemical processing to be extracted. Methods of Lithium Extraction Spodumene (Hard Rock Lithium Source): Spodumene is the most important commercially mined lithium mineral given its higher inherent Lithia content. Both open pit and underground mining methods are used to extract lithium minerals. Typically, the mineralized rock contains approximately 12% to 20% spodumene, or approximately 1% to 1.5% lithium oxide. In this traditional method, the rock must be mined and heated up to 1,100 degrees Celsius and then pulverized before the spodumene crystals are processed with acid to produce lithium. Once a mine is in production, getting lithium from hard rock is far quicker than producing from brine. Although, costs are higher because it involves traditional mining and an energy intensive separation process. This method of extraction thus is time, energy and cost intensive. Lithium Brines: The methodology of extraction is to pump salt water containing lithium from the ground into an evaporation pond. Filling the pond takes about a year, then the evaporation process can take anywhere from about eight months to three years. Salt lakes with a concentration of minimum 600 mg of lithium per liter are a cost effective source of lithium, but too much magnesium can also cause problems. A ratio of more than 9:1 magnesium to lithium is considered uneconomical. This method is the simplest and the most cost effective. Hectorite Clay: A newer source of lithium is clay deposits - which sits between brines and hard rock in terms of cost-effectiveness. The mining costs are cheaper with clay, as it is relatively easy to extract. However, the clay must be leached or roasted to extract the lithium, a chemically intensive process. There is currently no lithium produced from hectorite, but explorers say processing clay in Nevada could rival Chile's brines for cost effectiveness. 10

11 Exhibit 12: Lithium Brine Processing Source: Roskill According to Roskill, global lithium extraction totaled over 168,000t LCE in 2012, with Australia, Chile, Argentina and China being the largest producers. Extraction of lithium was sourced equally from hard rock sources and from brine. Chile was the largest producer of lithium in 2013 as per the US geological survey, producing nearly 13,500 tons of lithium. Chile alone holds nearly 27% of global lithium reserves, predominantly from the salt brines in Salar de Atacama. Australia was the second largest producer of lithium in 2012 with a production of 13,000tons of lithium followed by China and Argentina with 4,000 and 3,000tons respectively. Exhibit 13: Mine production and Reserves Data (metric tons) e Reserves United States W W 38,000 Argentina 2,700 3, ,000 Australia 12,800 13,000 1,000,000 Brazil ,000 Chile 13,200 13,500 7,500,000 China 4,500 4,000 3,500,000 Portugal ,000 Zimbabwe 1,060 1,100 23,000 World total (rounded) 435, ,000 13,000,000 Source: USGS The lithium brines in the Andes Mountains region which encompass parts of Argentina, Chile and Bolivia (no current production) are commonly known as the Lithium Triangle accounts for nearly half of the world s lithium production. In the mid-1990s, the development of these large-scale, low-cost brine resources in Chile and Argentina by SQM, Rockwood and FMC fundamentally changed global lithium supply. With its cost advantage over mineral-based production, brine producers lowered prices to gain market share, resulting in closure of mineral conversion plants in the USA, Russia and China. However, with increased demand, production was soon increased from the spodumene mines in China and Australia. Salt lakes cannot expand capacity easily due to the risk of collapsing water table. Most of the lithium production is concentrated in a few politically sensitive countries and any adverse situation could hamper the supply of lithium. The lithium market is oligopolistic with only a few large players according to the latest report from Roskill, Rockwood is the largest producer of lithium by sales followed by FMC, SQM and Talison. Rockwood and SQM have the world s leading operations by volume and source most their brine lithium from the Salar de Atacama in Chile. FMC has its brine operations in 11

12 the Salar de Hombre Muerto in Argentina. Australia s Talison Lithium is the leading miner of hard rock lithium minerals and produces 280,000 tpa lithium concentrates for customers predominately in China. The market is currently driven by consumer products that require battery grade lithium. Only a limited number of producers can supply the high end grade lithium. It is understood that even the largest suppliers of lithium carbonate including SQM, FMC, and Chemetall wouldn t have the capability to supply 99.99% Li 2CO 3 to the market. Exhibit 14: Lithium Carbonate Content in Various Devices Lithium Carbonate Content (g) Mobile Phone 1.7 Smart Phone 2.1 Tablet 19 Laptop 37 Power Tool 40 e-bike 75 HEV (3kWh) 2,500 p-hev (10kWh) 8,000 EV (35kWh) 28,000 Energy Storage (1MW) 700,000 Source: Credit Suisse Tesla s Gigafactory may change supply dynamics Tesla Motors is building a lithium ion battery factory in the US to meet the requirements of its electric vehicles. The project, known as Gigafactory, is currently under production and is slated to be completed by The project is of a significant scale with costs expected to exceed US$5 billion. By 2020, the Gigafactory is projected to achieve a production capacity of 35 GWh/year of cells and 50 GWh/year of battery packs. Analysts estimate that there may not be enough lithium to support the requirements of the Gigafactory. Bloomberg estimates that Tesla would require about 150,000 tons of lithium every year for its Gigafactory and while there are about 13 million tons of lithium reserves available, it may be insufficient due to the economic infeasibility associated with the quality/grade and transportation costs. Hence, the Gigafactory may change the lithium demand and supply dynamics significantly, leading to a shortfall of lithium supply. Lithium prices There is no exchange traded market for lithium chemicals, as producers and customers negotiate the prices based on customer-specific formulations. Prices for lithium concentrates used for conversion into chemicals are correlated to, and tend to follow the same trend as lithium carbonate prices. The lithium market is oligopolistic with only a few large players, hence the supply is well managed to meet the demand thus maintaining stability in prices. Further, the price of lithium is very marginal in the end product hence faces lesser risk of substitution. 12

13 Exhibit 15: Lithium Carbonate Prices Source: Roskill Lithium Carbonate prices saw a steep increase from US$2,700/ton in 2004 to nearly US$6,000/ton in 2007 to 2008 driven by higher demand from the battery market before a slight pullback in 2009 and 2010 due to lower demand affected by the financial crisis. Over supply kept the prices down in 2011 before recovering in Orocobre, an Australian mineral resource company, believes that over the medium term demand will be more strongly influenced by Asia and supply dominated by Australia, China, Argentina and Chile. This increase in demand will be met by the new production from projects expected to develop over keeping prices relatively flat. However, in the long run ( ) prices could see a sharp increase as demand for EV batteries is expected to double or even triple. The prices will also benefit significantly once the Gigafactory commences operations, which may lead to lithium supply gap, driving up the prices globally. 13

14 Growth Factors Access to low cost, high potential Sal de Vida Project could make Galaxy a substantial producer The Sal de Vida Lithium-Potash Brine Project, a flagship development project of Galaxy Resources acquired in July 2012 is estimated to support annual production of 25,000 tons of battery grade lithium carbonate and 95,000 tons of potash over a 40 year period. The brine based production provides the Company with extraction at very low costs, almost half of that under the spodumene mining method. According to the DFS, this project s pre-tax net present value is US$645 million (or US$380 million post-tax) at a 10% discount rate. Sal de Vida has the potential to generate total annual revenues in the region of US$215 million and operating cash flow before interest and tax of US$118 million per annum at full production rates. Average operating costs have been estimated at US$2,200 per ton (net of potash credits) of battery grade lithium carbonate. The total capital cost for Sal de Vida is estimated at US$369.2 million. Sal de Vida s brine chemistry is highly favorable, with high levels of lithium and potash, and low levels of magnesium and sulphide impurities. Galaxy has advanced the development of Sal de Vida, employing, where applicable, some of the same processes and technologies that have proven successful at the Jiangsu plant. The current ore reserve for the project is reported in accordance with National Instrument (non-jorc) and stands at 1.1Mt of retrievable lithium carbonate equivalent and 4.2Mt of potash. The deposit is low in magnesium with Mg/Li ratio of 2.2 and a SO 4/Li ratio of 11.5, which are low by industry standards and thus positive for saleability. Stronger balance sheet with lower debt levels and extended maturities Galaxy has turned itself around over the past 18 months from a company burdened with debt and uncertainty to an establishment that is structurally re-aligned, well capitalized and ably managed. The Company carried out the following changes to its operations: Significant debt reduction. The Company was burdened with over US$100 million of debt which was maturing in H2 2013, US$51 million of Chinese debt facilities maturing in H and a convertible issue of A$61.5 million due in November The debt was raised to facilitate maintenance at Mt Cattlin as the Jiangsu plant was still in ramp up and making losses. Galaxy negotiated US$4 million worth of the Chinese debt facility and restructured the remaining portion. In addition, the Company also successfully restructured the convertible bonds by removing the put redemption option and extending the full maturity to November The remaining US$60 million in convertible bonds have now reverted to a two year maturity date of 19 November 2015, with the coupon rate increased from 8% to 10% per annum. The restructuring of the convertible bonds eliminated a significant cash need, as well as providing a means by which some of the outstanding convertible bond debt was converted into equity. For any principal and accrued interest outstanding as at 19 November 2013, bondholders continue to hold the bonds until the maturity date of 19 November 2015 with a 2% increase in the coupon rate to 10% coupon per annum. Management changes. The Company made major restructuring changes to its management which led to full change of Board of Directors in June Capitalization. The Company successfully re-launched its rights issue, raising A$37.5 million in July 2013, including shortfall placement. 14

15 Cost rationalization. Galaxy s restructuring initiatives at corporate and subsidiary level led to reduction of corporate costs by 50%. Galaxy committed to reducing corporate costs in 2013 from US$17.6 million in 2012 to US$12.2 million. Further cost savings of US$7.0 million were targeted in The proceeds from the raisings to date also provided working capital for the Jiangsu Lithium Carbonate Plant (Jiangsu) in China and the Sal de Vida Lithium Brine and Potash Project (Sal de Vida) in Argentina and to pay costs associated with the raisings. Monetizing the James Bay and Mt Cattlin Projects Galaxy has 100% ownership in the James Bay and Mt Cattlin projects. Both are spodumene based lithium mining projects. Both of the projects have large lithium oxide reserves. James Bay in Quebec has a total resource of 22.2Mt at 1.2% LiO 2. The mineral spodumene in its pure form contains 8.02% lithium oxide. The Mt Cattlin project provided the Jiangsu plant with continuous feedstock supply, however, due to the fact that production costs were high, Galaxy decided to place the project on care and maintenance. With the sale of the Jiangsu project, Galaxy has been looking for ways to extract value from Mt Cattlin and in February 2015, the Company entered into an agreement with General Mining providing the latter an option for ownership rights for the use of the Mt Cattlin project. General Mining has completed its due diligence on the asset and is expected to make a final development decision within Q This agreement can turn around the cost absorbing project into a cash generative one for Galaxy Resources. Management changes to focus on developing new project Mr. Anthony Tse was appointed as the Managing Director to replace the outgoing Managing Director Mr. Ignatius Tan who resigned in June Galaxy appointed Mr. Rowen Colman as the CFO in December The changes in new management would help the Company concentrate on developing the new project. Mr. Rowen comes with strong industry experience which should benefit Galaxy. Other new board members and senior management also have considerable industry experience (For full bios please refer to the Management section at the end of the report). Battery led exponential demand forecast for lithium Galaxy Resources is well positioned to ride the wave of increasing demand for lithium driven by higher growth forecast for lithium-ion batteries. Preference for lithium-ion batteries is increasing strongly as it is extensively used in almost all portable electric devices including cell phone and computer, batteries with items such as shavers, power tools, and hybrid and electric cars switching over from the nickel varieties. Lithium-ion batteries have higher energy density to weight ratio, longer life with no memory effect which gives it an edge over other materials like nickel. Further, lithium is also more environmentally friendly compared to existing nickel-metal hydride or lead-acid technologies as lithium recovery leaves no waste when mining. Between 2003 and 2007 the battery industry doubled its consumption of lithium carbonate, the most common ingredient used in lithium-based products. 15

16 Exhibit 16: Lithium Demand Forecast (t LCE) Source: SignumBOX The small battery market comprising calculators, computers, cameras, communications devices, etc. is forecast to continue growth at high levels of 10% p.a. from 2017 to However, growth is expected to be driven by higher demand for the emerging large battery market for electric bicycles, hybrid and all electric vehicles growing at substantially higher rate of 28% p.a. from 2017 to Demand for lithium carbonate could get a boost with any increase in alternative vehicle sales as the larger format rechargeable batteries used in these vehicles consume more lithium by volume. Another area boosting the demand for lithium batteries are the grid electricity storage devices. Applications in solar and nuclear energy are expected to grow considerably over the next decade. Lithium salts are widely used as working fluid in utility sized concentrated solar power plants (CSP); which was estimated to grow from 1.5GW in 2010 to 25GW in The lithium market might just be at a flex point set for exponential growth. The auto industry is relying heavily on the lithium-ion batteries as an environmental friendly alternate for fossil fuels. As the volume of lithium carbonate in a vehicle battery is nearly hundred times the volume required in a laptop, the demand for lithium batteries is set to rise supported by the green-vehicle revolution, thus making lithium the most strategic commodity. Government support for electric vehicles provides further impetus to the lithium market With growing awareness for reducing carbon footprints many countries are providing subsidies, tax benefits and other incentives to use electric vehicles. This also facilitates reduction independency on oil, import costs of which have resulted in huge budget deficits for emerging non-oil producing countries. In India, the government has set a target of around 5 to 7 million electric vehicles by 2020 and to achieve the same, the government has introduced various tax exemptions for lithium-ion batteries used in electric vehicles. India has a huge potential for increasing electric vehicles. According to TechSci Research report lithium-ion batteries market in India, in revenue terms, is projected to grow at a CAGR of around 24% during The Chinese government is continuously developing the alternate energy market with a slew of supportive measure. China has set a total target of 16

17 500,000 units of electric vehicles and Hybrid Electric Vehicles by 2015.China has adopted a fuel economy target of 6.7 l/100 km for 2015, considering further increasing to 4.5 l/100 km by In July 2014, the Chinese government allowed the entry of foreign alternative energy automobiles in the local market and also developing charging stations to improve local infrastructure. In August 2014, the government further announced vehicle purchase tax exemptions for alternate energy automobiles. China is expected to have 150 million electric bikes by 2015, compared with 120 million in China s electric vehicle market is fast expanding as reflected by the fact that between January and September 2014 alone China produced 38,522 and sold 38,163 alternative energy automobiles, increasing at 290% and 280% over the corresponding period in 2013, respectively. President Obama set an ambitious goal in 2008 of putting one million advanced technology vehicles on the road by 2015 which would reduce dependence on foreign oil and lead to a reduction in oil consumption of about 750 million barrels through To achieve this goal the government announced various measures - Making electric vehicles more affordable with a rebate up to $7,500, advancing innovative technologies through new R&D investments, rewarding communities that invest in electric vehicle infrastructure through competitive grants. With only 198,000 electric vehicles as of April 2014, this target seems unachievable. Yet the US government is keen to pursue its goal towards clean energy and has proposed the following in the 2015 budget o o o Extending the 30 percent tax credit for Americans who invest in properties involved in advanced-energy products, including facilities that store energy for electric or hybrid-electric vehicles Increasing the maximum tax break for smaller alternative-energy vehicles, from $7,500 to $10,000. Obama s proposal also calls for extending the credit beyond plug-in electric vehicles to include all advanced-technology vehicles and for providing more flexibility for the credit. Extend tax credits on fuel-cell vehicles to those that run on such alternative fuels as hydrogen and liquefied natural gas SWOT Strengths High growth potential from the Sal de Vida Project. Galaxy s investment is Sal de Vida project in 2012 has the potential to generate revenue of US$215 million and operating cash flow before interest and tax of US$118 million per annum when operated at full capacity. The project is brine based having lower operating costs than the spodumene mining project in Jiangsu. The quality of lithium extracted at the Sal de Vida Project is also very high with lithium concentration of 692ppm and a magnesium: lithium ratio of Improved financial position. With the sale of the Jiangsu plant and restructuring of its balance sheet, Galaxy has reduced its debt burden by US$110 million and has also extended maturities of its debt to 2015 from 2013, resulting in improved liquidity. With a strong financial position, the Company is in an advantageous position to capitalize on the strong industry fundamentals. 17

18 Strong technical knowledge. Galaxy Resources has rich experience in the lithium mining and extraction techniques. Galaxy developed and patented its purification technology in 2010 and has successfully proven the technology at its Jiangsu plant in China. Galaxy s purification technology is designed to be applied to either hard rock or brine based lithium carbonate production processes. The function of the purification circuit is to remove impurities entrained in the lithium carbonate crystal structure, which cannot be removed by washing. The Company is applying these techniques to upgrade the quality of lithium at the Sal de Vida project. New management to drive through the growth plans. The management team is well experienced with Anthony Tse (Managing Director) and now strengthened with the addition of a new CFO Rowen Coleman, as well as Martin Rowley (Chairman). Martin is a co-founder and Executive Director of First Quantum Minerals, which is listed on the London and Toronto Stock Exchange, and is the world s fifth largest copper producer. The depth, competence and global experience of the Company s management team are the key factors behind the strong development of the projects. Weaknesses Project is still in the development stage. The Company has not reported significant revenues and profits till date as it is still an early stage company. Concentration of operations on a single project Sale de Vida is the sole project of the Company. With sale of the Jiangsu project, the Company is somewhat dependent on this project for generation of revenues. There will be some moderate contribution of revenues from Mt Cattlin. Further, being in only lithium extraction, the Company s growth prospects are highly dependent on this mineral. The mining of potash should add some diversity once the Sal de Vida project is operational and the extraction of tantalum from Mt Cattlin once production resumes. Opportunities Promising industry outlook underpinned by exponential demand from rechargeable battery. The lithium industry is on the onset of witnessing an exponential growth driven by increasing demand for lithium batteries led by electric and hybrid vehicles, and consumer electronics like laptops, cell phones and other portable electronic devices. According to industry forecasts by Roskill the demand for lithium is expected to grow at 11% annually over Overall demand is expected to outstrip supply by 2016 resulting in increased prices and improving profitability of the producers. Sale of James Bay and Mt Cattlin assets could further strengthen the Company s financials and increase focus on the key Sal de Vida project. Galaxy is looking for strategic options for the Company s assets in James Bay and Mt Cattlin. Sale proceeds of these assets could be utilized in acquiring new high potential assets or for investing in existing flagship project. Threats Any unforeseen delay in production at the Sal de Vida project. While the Company is looking to establish financial feasibility, any unseen obstacle or delay can put the Company s future and business prospects in severe jeopardy. Threat of demand for electric vehicles not increasing as per expectations. There could be a possibility of the demand for electric vehicles not taking off as anticipated. The US had anticipated one million advanced technology vehicles on the road by 2015 and they are not any close to meeting this target. If demand does 18