Galaxy Resources
Contract signed
Mt Cattlin - early mover in lithium project pipeline
Metals & mining
19 December 2016
Galaxy (GXY) has signed binding agreements for 2017 delivery for 120,000
tonnes of lithium concentrate at US$830/t with upside to US$905/t at higher
concentrate grades. Mining has started, the process plant is operating
continuously and trucking of concentrate to the port has commenced with
Price
A$0.52
the first export shipment expected by the end of December 2016.
Net debt (A$m) at 30 September 2016
Market cap
A$953m
US$0.75/A$
20.2
Shares in issue
Year
end
12/15
12/16e
12/17e
12/18e
Revenue
(A$m)
0.1
18.0
186.0
205.8
PBT*
(A$m)
(11.9)
(6.5)
80.0
91.5
EPS*
(c)
(1.1)
(0.4)
4.4
5.0
DPS
(c)
0.0
0.0
0.0
0.0
P/E
(x)
N/A
N/A
11.8
10.4
Yield
(%)
N/A
N/A
N/A
N/A
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles,
exceptional items and share-based payments.
1,832.5m
Free float
45
Code
GXY
Primary exchange
ASX
Secondary exchange
N/A
Share price performance
Innovation in lithium concentrate processing
The extent to which the process plant at Mt Cattlin has been redesigned may not
be fully appreciated. An enormous amount of work has been done to increase its
earnings capability. The scope has included a 100% increase in throughput
capacity, additional circuits to remove deleterious mica, measures to significantly
increase the grade of the concentrate and steps to increase recoveries. Production
tests are still underway to maximise revenue by optimising recoveries and
concentrate grades.
Mt Cattlin almost alone in bringing on new capacity
Although there are numerous lithium projects that aspire to be producers in the
future, there is a dearth of definite new projects entering production in the near
term. GXY is the newest producer supplying up to 20,000 tonnes of lithium
carbonate equivalent (LCE) of raw material into the growing lithium market. After
the 2016 starts at GXY’s Mt Cattlin project and the Mt Marion project (Jiangxi
Ganfeng Lithium/Mineral Resources/Neometals), there appear to be no new lithium
projects until at least late 2017.
Valuation: Exposure to the lithium price
We have valued GXY using NPV10 methods for Mt Cattlin and Sal de Vida under a
base case (conservative) and two scenarios: Case 1 and Case 2 (more bullish).
With resource similarities between the Mt Cattlin operation and the James Bay
project, we have also determined an indicative valuation for James Bay. Our
valuation for GXY’s assets is A$0.50/share (base), A$0.55 (Case 1) and A$0.68
(Case 2). Exploration potential at both Mt Cattlin and James Bay could lift the
valuation – a three-year extension at both properties would lift the valuation to
A$0.57/share (base), A$0.62 (Case 1) and A$0.75/share (Case 2). Valuations will
increase with time as capital is spent and projects developed.
%
1m
3m
12m
Abs
45.1
35.5
485.2
Rel (local)
40.1
30.8
431.7
52-week high/low
A$0.55
A$0.08
Business description
Galaxy Resources (GXY) is a producer and
developer of lithium feedstocks, both hard rock
concentrate and lithium brine. Mt Cattlin has
commenced (160,000tpa lithium concentrate) with
planning for its Sal de Vida brine project (25,000tpa
lithium carbonate) at an advanced stage.
Next events
Annual financial report
March 2017
Analysts
Peter Chilton
Tom Hayes
+61 (0)2 9258 1161
+44 (0)20 3077 5725
[email protected]
Edison profile page
Galaxy Resources is a
research client of Edison
Investment Research Limited
Mt Cattlin: Poised to capture high Li2O prices
With the reopening of the Mt Cattlin operation, one of the objectives was to redesign and
reconfigure parts of the plant to increase its earnings capability. To achieve this, throughput rates
were increased from 0.8mtpa to 1.6mtpa and measures were taken to substantially increase the
recovery (or yield) and grade of the lithium concentrate (Li2O). Lithium concentrate is sometimes
referred to as spodumene. One of the measures taken included the removal of a substantial
proportion of the mica, which had previously reported to the product stream and diluted the lithium
grade of the concentrate.
Under the new plant configuration, earnings benefit from higher sales volumes and a higher value
concentrate. Lithium concentrate is the raw material sold to the converters, which then upgrade the
lithium concentrate to lithium carbonate or lithium hydroxide. These are the higher priced endfeedstocks, which are sold to battery makers. There is an approximate formula for lithium
concentrate prices, which is linked to the lithium carbonate price. Prices are generally higher for
higher-grade concentrates. There may be penalties for impurities such as mica. Price formulas may
vary between contracts and may be affected by supply-demand conditions at the time.
GXY is the only existing, independent source of lithium concentrate supply in the market. This is
due to the fact that both Greenbushes (operated by Talison Lithium, 51% owned by Tianqi and 49%
by NYSE-listed Albemarle Corporation) and Mt Marion are selling their concentrate supplies to their
project shareholders rather than in the open market.
With no formal spot market for lithium concentrate prices, GXY’s concentrate prices are being
driven by the incremental supply-demand characteristics of its production.
Continuous output achieved at the processing plant
GXY has now commenced 24-hour production at the Mt Cattlin processing plant. The company was
targeting a lithium concentrate grade of at least 5.5% Li2O with <5.0% mica in the concentrate.
However, GXY has achieved better than this. The first five composite samples of production
achieved grades ranging from 5.8 to 6.4% Li2O with mica no higher than 4.7% and as low as 1.7%.
Both mica and moisture levels were below the contract specification thresholds. The achievement
of continuous operations and the improved specifications represent the completion of major
milestones for the Mt Cattlin project.
Mining underway
GXY has recommenced mining at Mt Cattlin using a mining contractor. Initial material for the
processing plant was from stockpiled ore. Production of run-of-mine ore is now needed to support
the ramp-up of the Mt Cattlin processing plant
Optimisation of the process to maximise revenue
Although GXY knows it can produce a concentrate at 6% Li2O, this may not necessarily generate
the optimum cash flow for the company. As the concentrate grade is increased, Li2O recoveries
tend to decrease. There is a trade-off between achieving a high concentrate grade and sacrificing
some recovery. GXY currently has insufficient data to analyse the financial impact, so it will carry
out production tests and assessments that will look at the relationship between concentrate grade
(from 5.5% to >6% Li2O) and Li2O recovery and the financial impact. The impact will be quantified
over the next couple of months.
Galaxy Resources | 19 December 2016
2
The initial targeted Li2O recovery level is 50%. GXY is to work on a number of initiatives during
2017 that have the objective of increasing recovery above the 50% level. If successful, this would
increase the lithium concentrate GXY would have available for sale.
Trucking of concentrate to the port, first exports imminent
Trucking of the Mt Cattlin concentrate to the Port of Esperance began on 5 December 2016. This
followed inspection of the product for mica concentration and moisture content by representatives
from Esperance Port Authority and Qube Logistics.
GXY has given formal instruction to Mitsubishi Corporation to nominate a vessel for the first export
shipment of concentrate from Esperance. The company expects the first shipment to take place by
the end of December 2016.
Offtake agreement for 2017 – upside from escalation terms
GXY had a binding agreement with its existing China-based buyers for the sale of 120,000 tonnes
lithium concentrate to be delivered in calendar 2017. These buyers are chemical converters that
produce both lithium carbonate and lithium hydroxide. Pricing was not fixed and was finalised as
guided and expected in Q416. The lithium concentrate price has now been negotiated at US$830/t
FOB, minimum 5.5% Li2O. This is higher than our forecast of US$750/t. There is upside to this
price, with US$15/t escalation for every 0.1% improvement in the grade of Li 2O delivered. This
would lead to an agreed price of up to US$905/t for a 6% lithium concentrate.
GXY is discussing longer-term arrangements with its existing customers beyond 2017 and will also
look at options to diversify its customer base. Offtake arrangements are settled through partner
Mitsubishi Corporation.
Exhibit 1: Mt Cattlin an early mover in the development projects pipeline
Project
Ownership
Type
Development stage
Mt Cattlin
Mt Marion
La Negra 2
Pilgangoora
Pilgangoora
Galaxy (100%)
Neometals (14%)
Albermarle (100%)
Altura (100%)
Pilbara Minerals
(100%)
Nemaska (100%)
Galaxy (100%)
Hard rock
Hard rock
Brine
Hard rock
Hard rock
Commissioning
Commissioning
Evaporating brine
DFS released
DFS released
Whabouchi
Sal de Vida
CauchariOlaroz
Total
Lithium Americas
(50%)
Hard rock DFS released
Brine
Revised DFS
released
Brine
Considering DFS
revision
Targeted
first
production
Q416
Q416
Q417
Q417
Q118
Nameplate
production
cap. (kt LCE)
20
27
20
36
44
Capex
Market
(A$m) cap (A$m)
Funded
Funded
Funded
140
214
925
203
13,819
166
706
Capex/
market cap
(x)
N/A
N/A
N/A
0.84
0.30
Existing
production/
cash flow





Q318
H219
28
25
549
501
365
925
1.50
0.54


2019
50
900
226
1.99

2,304
Source: Company disclosure
Production guidance for 2017
GXY’s production guidance for 2017 is for 160,000 tonnes of lithium concentrate (spodumene)
based on an approximate 50% recovery. This production level will satisfy the c 40,000 tonnes of
2016 contracted volumes to be delivered at US$600/t and the 120,000 tonnes of newly contracted
2017 volumes at a minimum US$830/t. It is expected that 35,000 tonnes of 2016 contracted offtake
will be delivered in 2017.
GXY will continue working to improve recoveries at the Mt Cattlin processing plant. This may result
in incremental production in 2017. This would be sold to existing and/or new customers.
Galaxy Resources | 19 December 2016
3
Valuation
Our valuations have been revised for Mt Cattlin updates in December 2016 and the revised Sal de
Vida DFS in August 2016. Although we have incorporated higher lithium concentrate prices for
FY17, the effect on valuations has been immaterial due to the long dated nature of the projects,
additional shares in issue and recoveries that are still at the lower end of the future expected range.
The share issue was announced on 11 November 2016 for total additional shares of 25.7m
comprising conversion of 25m options at A$0.03/share, 0.63m shares issued to a contractor for
services at Mt Cattlin with the balance issued as consideration for the acquisition of tenements.
Exhibit 2: Price scenarios for lithium carbonate and lithium concentrate (Li 2O)
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
LT
Base case
Lithium carbonate (US$/t)
Lithium concentrate (US$/t)
10,000
600
10,000
830
10,000
650
7,500
550
7,500
550
7,500
550
7,500
550
7,500
550
7,500
550
7,500
550
7,500
550
Case 1
Lithium carbonate (US$/t)
Lithium concentrate (US$/t)
10,000
600
10,000
830
10,000
650
10,000
650
10,000
650
7,500
550
7,500
550
7,500
550
7,500
550
7,500
550
7,500
550
Case 2
Lithium carbonate (US$/t)
Lithium concentrate (US$/t)
10,000
600
10,000
830
10,000
650
10,000
650
10,000
650
10,000
650
10,000
650
10,000
650
10,000
650
10,000
650
7,500
550
Source: Edison Investment Research
We have produced valuations for a base case (conservative) and two scenarios, Case 1 and
Case 2 for GXY using price scenarios from Exhibit 2. These are shown in Exhibit 3. Case 1
represents a lower demand scenario than Case 2 with prices falling after 2020. Case 2 represents a
high demand scenario with higher prices sustained to 2025.
Exhibit 3: Valuation of GXY assets
Base case
Projects
Case 1
A$/share
Sal de Vida (US$m)
372.3
Sal de Vida (A$m)
Mt Cattlin (A$m)
James Bay (A$m)
496.4
320.5
103.9
0.27
0.17
0.06
548.1
341.4
125.7
920.8
0.50
1,015.2
Total
Issued shares
Case 2
A$/share
A$/share
411.1
1,832.5
532.3
0.30
0.19
0.07
0.55
A$/US$
709.7
366.1
165.0
0.39
0.20
0.09
1,240.8
0.68
0.75
Source: Edison Investment Research
Our valuation assumptions include:

NPV10 valuation methodology: we have carried out NPV10 valuations for GXY’s Mt Cattlin
operation and its Sal de Vida and James Bay projects.

Lithium carbonate prices: we used the lithium carbonate and lithium concentrate prices in
Exhibit 2 for our valuations. For lithium concentrate we used US$600/t in 2016 (contracted at
this price), US$830/t in 2017 (contracted at this price for a 5.5% Li2O concentrate) and
US$650/t in 2018. We developed a formula that provides an approximate link between the
lithium concentrate price and the lithium carbonate price. The lithium concentrate price will also
be affected by the supply/demand characteristics of lithium concentrate itself.

Potash price: we used US$300/t, which we believe is a long-term sustainable price.

Mt Cattlin: our valuation attributes 100% of the project to GXY following the takeover of GMM

Sal de Vida: originally, it was proposed to develop Sal de Vida in more than one stage. We
now assume the project is developed in one stage. While GXY may sell an interest in this
project, our valuation attributes 100% of the project to GXY. If an interest in the project is sold,
we assume the transaction is accomplished at the corresponding share of the NPV.

James Bay: this is still an early-stage project. A DFS is expected to recommence in H117.
However, it is similar in deposit type and size to Mount Cattlin. Lithium (Li 2O) grades are slightly
Galaxy Resources | 19 December 2016
4
higher but tantalum grades have not been recorded. Given the similarities, we have modelled
James Bay on a similar basis to Mt Cattlin assuming no tantalum co-product revenue. We
assume a capital cost of US$112.5m (A$150m) to develop the project.
We have assessed the sensitivity of the GXY valuation to the long-erm LCE price and increased
mine lives from exploration success:

Valuation sensitivity to assumed LCE price: the base case GXY valuation, across all its
projects, changes by approximately A$250m or A$0.14/share for every US$1,000/t change in
the long-term LCE price assumed.

Valuation sensitivity to exploration success and extended mine lives: recognising the
exploration potential at both properties, we have also assessed the valuation impact of an
additional three years of mine life at both Mt Cattlin and James Bay (see Exhibit 4). Sal de Vida
already has a long mine life in the order of 40 years.
Exhibit 4: Valuation of GXY assets: assumes an extra three years life at both Mt Cattlin and James Bay
Base case
Projects
Case 1
A$/share
Case 2
A$/share
Sal de Vida (US$m)
372.3
Sal de Vida (A$m)
Mt Cattlin (A$m)
James Bay (A$m)
496.4
409.6
144.6
0.27
0.22
0.08
548.1
430.3
166.4
Total
1,050.6
0.57
1,144.8
Issued shares
1,832.5
A$/share
411.1
532.3
0.30
0.23
0.09
0.62
A$/US$
709.7
467.6
205.7
0.39
0.26
0.11
1,383.0
0.75
0.75
Source: Edison Investment Research
Financials
Upfront prepayments of US$13.5m were received in 2016 in respect of 22,500 tonnes of lithium
concentrate.
Physical concentrate shipments are anticipated by the end of December 2016.
Our net income forecast for FY17 has increased from A$68.6m to A$80.0m, mainly as a result of
the higher than expected lithium concentrate settlement of US$830/t vs our forecast of US$750/t.
We have not changed price forecasts beyond FY17 and earnings forecasts are essentially
unchanged.
Galaxy Resources | 19 December 2016
5
Exhibit 5: Financial summary
A$'000s
31-December
PROFIT & LOSS
Revenue
Cost of sales
Gross profit
General & administrative costs
EBITDA
Depreciation
EBIT (before amort. and except.)
Intangible amortisation
Exceptionals
Share based payments
EBIT
Net Interest
Profit before tax (norm)
Profit before tax (FRS 3)
Tax
Profit after tax (norm)
Profit after tax (FRS 3)
Minority interest
Net income (norm)
Loss from discontinued operation
Net income (FRS 3)
2013
IFRS
2014
IFRS
2015
IFRS
2016e
IFRS
2017e
IFRS
2018e
IFRS
2019e
IFRS
1,459
(9,503)
(8,044)
(5,470)
(13,514)
(6,945)
(20,459)
0
(48,584)
(449)
(69,492)
(12,346)
(32,805)
(81,838)
0
(32,805)
(81,838)
0
(32,805)
26,064
(107,902)
185
(4,494)
(4,309)
(4,013)
(8,322)
(152)
(8,474)
0
(10,134)
(211)
(18,818)
(10,396)
(18,870)
(29,214)
0
(18,870)
(29,214)
133
(19,003)
25,490
(54,837)
50
(1,981)
(1,931)
(4,488)
(6,419)
(123)
(6,542)
0
(1,258)
(2,446)
(10,246)
(5,334)
(11,876)
(15,580)
0
(11,876)
(15,580)
710
(12,586)
(70,443)
54,153
18,000
(16,270)
1,730
(5,000)
(3,270)
(1,000)
(4,270)
0
0
(1,600)
(5,870)
(2,207)
(6,476)
(8,076)
0
(6,476)
(8,076)
0
(6,476)
0
(8,076)
186,005
(94,769)
91,236
(5,000)
86,236
(3,450)
82,786
0
0
0
82,786
(2,765)
80,021
80,021
0
80,021
80,021
0
80,021
0
80,021
205,769
(99,904)
105,865
(5,000)
100,865
(3,450)
97,415
0
0
0
97,415
(5,910)
91,504
91,504
0
91,504
91,504
0
91,504
0
91,504
210,353
(108,896)
101,457
(5,000)
96,457
(11,150)
85,307
0
0
0
85,307
(11,773)
73,534
73,534
(22,060)
51,474
51,474
0
51,474
0
51,474
721.8
(4.5)
(14.3)
0.0
1,044.2
(1.8)
(5.1)
0.0
1,137.7
(1.1)
4.9
0.0
1,526.0
(0.4)
(0.5)
0.0
1,832.5
4.4
4.4
0.0
1,832.5
5.0
5.0
0.0
1,832.5
2.8
2.8
0.0
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
10
-18
-24
49
46
45
51
49
47
48
46
41
139,416
0
139,314
0
102
177,512
1,162
537
2,565
173,248
(205,437)
(4,547)
(64,702)
(945)
(135,243)
7,376
0
(7,376)
104,115
132,944
0
132,904
0
40
202,385
1,096
669
13,389
187,231
(277,809)
(5,162)
(101,233)
(15,610)
(155,804)
7,455
0
(7,455)
50,065
127,239
0
125,690
0
1,549
12,444
1,065
6,618
4,761
0
(1,414)
(1,361)
0
(52)
0
35,467
(28,293)
(7,174)
102,802
437,290
0
437,290
0
0
(11,190)
856
1,500
(13,546)
0
(10,802)
(750)
(10,000)
(52)
0
35,413
(28,239)
(7,174)
379,885
565,174
0
565,174
0
0
67,832
7,481
15,500
44,850
0
(17,803)
(7,750)
(10,000)
(52)
0
136,746
(129,572)
(7,174)
478,457
693,057
0
693,057
0
0
134,553
7,909
17,147
109,497
0
(18,626)
(8,574)
(10,000)
(52)
0
238,079
(230,906)
(7,174)
570,904
750,574
0
750,574
0
0
101,549
8,658
17,529
75,361
0
(18,817)
(8,765)
(10,000)
(52)
0
197,546
(190,372)
(7,174)
635,759
(18,560)
139
0
(6,288)
(6,042)
25,573
0
(5,178)
160,426
(3,278)
40,232
197,380
(8,987)
(16,399)
0
(6,915)
13,030
25
0
(19,246)
197,380
25,786
20,482
243,648
(7,380)
(12,952)
185
(1,865)
46,931
(23)
0
24,897
243,648
(36,714)
(183,402)
23,532
1,446
(2,207)
0
(27,600)
0
0
0
(28,307)
23,532
10,000
18,253
51,785
91,161
(2,765)
0
(131,333)
0
0
0
(42,937)
51,785
101,333
(58,397)
94,722
100,557
(5,910)
0
(131,333)
0
0
0
(36,687)
94,722
101,333
(64,646)
131,409
86,837
(11,773)
0
(68,667)
0
0
0
6,398
131,409
(40,533)
34,136
125,011
Average number of shares outstanding (m)
EPS - normalised (c)
EPS - (IFRS) (c)
Dividend per share (c)
Gross margin (%)
EBITDA margin (%)
Operating margin (before GW and except.) (%)
BALANCE SHEET
Non-current assets
Intangible assets
Tangible assets
Investments
Available for sale assets
Current assets
Stocks
Debtors
Cash
Available for sale assets
Current liabilities
Creditors
Short term borrowings
Other
Liabilities assoc with for sale assets
Non-current liabilities
Long term borrowings
Other long term liabilities
Net assets
CASH FLOW
Operating Cash Flow
Net Interest
Tax
Capex
Acquisitions/disposals
Equity financing, other
Dividends
Net cash flow
Opening net debt/(cash)
Debt initiated
Other
Closing net debt/(cash)
Source: Company accounts, Edison Investment Research
Galaxy Resources | 19 December 2016
6
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