Galaxy Resources (GXY) has exposure to both hard rock lithium assets (Mt Cattlin, James Bay) and brine-based lithium assets (Sal de Vida). After the takeover of General Mining (GMM), Galaxy now has 100% of these assets. The Mt Cattlin project will begin shipments during December 2016, after its reopening, capitalising on current high lithium prices.
Mt Cattlin: Cash flow accelerated by prepayments
The Mt Cattlin hard rock project has already generated first cash flows through offtake prepayments. GXY expects the first shipment of spodumene concentrate to occur during December 2016. It will sell the first 45,000 tonnes of concentrates to offtake customers in China at the 2016 contract price of US$600/t, with the same customers indicating demand for 120,000 tonnes in 2017. Initial production guidance is 160,000 tonnes for 2017. Cash flow will be used to assist with the funding of GXY’s next project, the Sal de Vida lithium brine project in Argentina. GXY is expecting to begin commissioning Sal de Vida in 2019 with a nameplate lithium carbonate production capacity of 25,000tpa.
Energy storage needed as power generation changes
In the past 12 months, there has been a step change in lithium’s forward momentum. Coal-powered generation is under pressure and solar generation is beginning to emerge as a serious green alternative to wind. Utilities are now beginning to offer energy storage solutions to their customers. Electrical vehicles (EV) are gaining credibility with a number of expected commercial manufacturers and likely price points. These developments will all require energy storage and most of these will be based on lithium for its high-energy density and the lack, so far, of an efficient substitute. In response, new battery plants are being built. Lithium prices may remain high, while demand growth rates are elevated.
Valuation: Leveraged to the LCE price, exploration
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. After completion of the GXY takeover of GMM with 1,807m issued shares, our valuation for GXY’s assets is A$0.51/share (base), A$0.56 (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$0.58/share (base), A$0.63 (Case 1) and A$0.76/share (Case 2). Valuations will increase with time as capital is spent and projects developed.