Galaxy Resources (GXY) | Only the start of the campaign, June Q a better indicator
Mt Cattlin sales exceed expectations: Spodumene production in the March quarter was 14,300t, at the bottom end of guidance of 14,000-17,000t and less than our forecast. The production is a reflection of the extended break and the move to campaign treatment. Sales of 32,512t exceeded our forecast with the company able to sell more out of stockpiles prior to the major COVID-19 disruption to consumers. Operating costs for the quarter were US$592/t FOB which was higher than our forecast of US$402/t due to the operators coming to grips with stopping and starting production and lower process recoveries. Management did note that costs in the month of March were US$399/t even with the 3wk on/1wk off campaign and they felt that more could be achieved in terms of costs (another quarter of operations will be required to provide guidance).
Spodumene market is soft: GXY is expecting CIF spodumene prices to be below US$450/t in the first half which is about US$25/t more than we were modelling. The positive is that Mt Cattlin has signed a contract with a new customer which diversifies the offtake further and it remains fully contracted for 2020. The flipside is that the delivery schedule is still up in the air and with 4-5mths of spodumene stocks in China at present, demand and pricing could see some volatility.
Sal de Vida (SdV) advancement paused: GXY made good progress on the pilot plant and ponds during the quarter, COVID-19 regulations have seen all work on site stop and engineering work is ongoing. Catamarca has allowed mines to restart but SdV is in development phase. The CEO noted that with the ponds partially filled and evaporation started, that engineering was on the critical path, rather than the plant. The company will provide additional information on the sizing of the operation when the NI43-101 has been updated. Our view is that the 25ktpa of LCE is unlikely to change unless it is driven by a potential JV partner, otherwise a two-stage plant could be funded by GXY alone if the market improves.
Investment view: GXY has the best balance of the lithium plays with net cash of US$129m and can meet its operating and development obligations should the market and the COVID-19 environment allow. After adjusting for lower spodumene prices and a delay in a price recovery and increased production our valuation has fallen A$0.01ps to A$1.58ps and our NLAT for CY20 has increased by US$2.5m to $14.1m and our NPAT for CY21 has fallen US$8.2m to US$10.2m. Our price target which takes into account the risk of further development delays has fallen from A$1.01ps to A$0.90ps. We have upgraded to BUY from HOLD but would wait to see some evidence of a recovery in lithium demand. Click here to read full report