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Galaxy Resources - Strongly Positioned for a New Lithium Era

Galaxy Resources – Strongly Positioned for a New Lithium Era

Overview

Galaxy Resources Limited (ASX:GXY) is the world’s newest lithium producer. Galaxy Resources primary assets include the Mt Cattlin spodumene project in Western Australia, the Sal de Vida lithium brine project in Argentina and the James Bay spodumene exploration project in Quebec, Canada.

Galaxy Resources has recently completed a successful two-year restructuring under a new board and management, which includes Martin Rowley as Chairman of the Board, and Anthony Tse as Managing Director. Rowley is a respected leader in the global mining industry and a co-founder of First Quantum Minerals. Tse has extensive senior corporate management experience, in strategy, development and M&A, as well as corporate finance and capital markets. Under the new leadership, Galaxy has reduced its net debt from a peak of over A$200 million to A$20 million and is now in a strong financial position to capitalize on a new era in lithium.

Investment Highlights

  • Diversified portfolio with three globally significant hard rock and brine based lithium assets across multiple geographies
  • Restart of spodumene and tantalum production at Mt Cattlin at end Q1 2016
  • Spodumene offtake agreement with Mitsubishi; near-term cash flow expected
  • Flagship Sal De Vida Project in Argentina with market leading brine chemistry
  • New management has transformed balance sheet, reduced net debt from over A$200m historically to A$20m today
  • Highly credentialed Management and Board with strong networks in the key Asian lithium markets, having built a customer base of over 40 clients for the Jiangsu Operations
  • Deep experience in project development, construction and operations – previously built out the Jiangsu Lithium Carbonate Plant, the largest design capacity and most technologically advanced in Asia, and the Mt Cattlin spodumene mine
  • Robust lithium macro trends with surging demand from energy storage applications and lagging supply side

Lithium Market: Strong Pricing Environment

Lithium was one of the few commodities to actually post price gains in 2015, largely due to supply constraints and robust demand from the lithium-ion battery industry.

“The reality is that supply is very tight in the market at the moment,” explains Anthony Tse, Galaxy Managing Director. “Demand continues to grow quite robustly, especially in China which broke the record in 2015 for new energy vehicles sold into the market—around 379,000 vehicles.” That’s more than a several-fold increase in electric car sales in China over 2014.

While prices started off the year around US$5,800/tonne, by the end of 2015 lithium pricing was heading well north of US$10,000/tonne, according to Canaccord Research in a recent report on Galaxy Resources.

Stepping into a New Galaxy in 2016

Galaxy Resources has undergone serious changes for the better since the new board and management team led by Martin Rowley and Anthony Tse took over the leadership of the company in 2013. In as little as two years Galaxy Resources has successfully re-structured its balance sheet and is now well positioned for cashflow and growth into a diversified lithium producing and development company. Pivotal to this turn-around was strategically reducing the company’s more than A$200 million dollars of debt to a more manageable A$20 million and shifting the focus from the mid-stream processing operations to its developing its primary lithium resource assets.

Galaxy’s transformation included:

  • initial restructuring of over A$110 million in bank financing and convertible bonds;
  • successful capital raise of A$37 million through a rights issue;
  • significantly reducing corporate and development overheads by 70% through cost reduction programs;
  • divestment of the Jiangsu Operations in China (thus deconsolidating over US$100 million of debt), to focus on primary resource assets;
  • the discounted re-purchase of half of the convertible bonds;
  • refinancing of remaining debt through redeeming the balance of convertible bonds with a new three-year debt facility; and
  • the establishment of a joint-venture partnership with General Mining to re-start production at the Mt. Cattlin spodumene project.

The major end-goal for Galaxy Resources new management was “fixing the problems while defending shareholder’s equity,” states Tse. At the start of 2016, shareholders rang in the new year by stepping into a new Galaxy. “Coming into 2016 we have not only have fixed our balance sheet overhang issues but are also on the verge of production at Mt Cattlin which will bring in near term cash flow. Moving further into 2016 we are much stronger position financially, from both a balance sheet and cash flow position, to move forward to develop our flagship Sal de Vida Project .”

CALLOUT: Galaxy Resources is now on the horizon of being cash flow positive with the re-commencement of production at Mt. Cattlin by the end of Q1 2016.

Mt Cattlin Project: Spodumene and Tantalum in Western Australia

Galaxy Resources Mt Cattlin is a spodumene and tantalum project is located two kilometers north of Ravensthorpe and 450 kilometers southeast of Perth in Western Australia. Operations at Mt Cattlin include a processing plant with o a 4-stage crushing circuit producing a -6mm product from run-of-mine ore. The plant is capable of producing upwards of 137,000 tonnes per annum of lithium oxide concentrate and 87,000 pounds per annum of contained tantalum.

Between 2010 and mid-2012, Mt Cattlin produced 114 kilotonnes of spodumene concentrate at a grade of approximately 5.5% percent lithium oxide. Operations were halted in mid-2012 and the project was later placed on care and maintenance in February 2013.

JV with General Mining

At the beginning of 2015, Galaxy Resources recognized that supply of lithium feedstock into the China market was tightening, while demand for lithium products continued to grow. As it was still in the final stages of completing its balance sheet restructuring and with limited liquidity, it looked for capital efficient ways to restart production of spodumene at Mt Cattlin. Galaxy Resources entered into agreement with General Mining in September 2015, which gave the latter the right to earn into a 50 percent equity stake for A$25 million:

  • A$7 million in upfront CAPEX contributions (completed in December 2015)
  • Annual cash payments to Galaxy of A$6 million over 3 years
  • Operating cashflow to be shared on a 50/50 basis

The deal will allow Galaxy Resources to re-enter the lithium market, with its GMM having to provide the capital for the restart CAPEX and ramp-up, and begin generating near-term cash flow upon recommencement of production of spodumene and tantalum.

Revised resource/reserve estimate and independent review

In anticipation of the finalized agreement, General Mining completed a revised resource and reserve estimate for Mt Cattlin in August 2015:

Galaxy Resources - Strongly Positioned for a New Lithium Era

In October 2015, General Mining published results of an independent review of the Mt Cattlin project based on a 800 kilotonne per annum operation producing 112 kilotonnes per annum of spodumene concentrate and approximately 500 tonnes per annum of tantalite concentrate over a mine life of 17 years. Additional highlights from the study include:

Galaxy Resources - Strongly Positioned for a New Lithium Era

The Mt Cattlin project “is one of the few low capex, hard rock projects expected to come on line in the next 12 months,” noted research from Canaccord in a December 2015 report.

Production to begin in 2016

Mt Cattlin is now on track to re-start production in March 2016 with an accelerated ramp-up period. The 2016 target production timeline includes:

  • March 2016—Fines circuit commissioning
  • June 2016—Coarse circuit commissioning
  • July 2016—First shipment of concentrate
  • December 2016—Full Optimization of Plant

Off-take agreement with Mitsubishi

General Mining signed a four-year spodumene offtake agreement with Mitsubishi in October 2015 for the total production of lithium concentrate produced from Mt Cattlin. As of January 2016, the finalization an offtake agreement for the tantalum concentrate production from Mt Cattlin is in the works.

The significant growth in lithium prices since Mt Cattlin was put on care and maintenance combined with a much lower Australian dollar greatly improves the economics of the Mt Cattlin project, according to Canaccord. Based on the expectation of further lithium price growth, the firm has said it sees “the potential for solid operating margins once at targeted production rates.”

Sal De Vida: Lithium Brine Deposit in Argentina

The Sal de Vida lithium and potash brine deposit is Galaxy Resource’s wholly-owned flagship project. Sal de Vida is recognized as one of the largest and highest quality undeveloped lithium brine deposits in the world. Galaxy acquired the project as part of its merger with Lithium One in March, 2012. Sal de Vida is located in northwest Argentina in what is known as the Lithium Triangle which produces more than 60 percent of the world’s annual lithium output.

The project encompasses 385 square kilometers on the eastern half of the Salar de Hombre Muerto at an altitude of about 4,000 meters, straddling Salta and Catamarca Province. The western portion of the salar is home to the Fenix lithium brine operation, the country’s only commercially producing lithium operation (owned by FMC subsidiary) which has been operating there since the 1990’s and has a reported mine life of over 75 years. Orocobre’s Tincalayu borate mining operation lies to the northwest of the country in Jujuy Province.

Sal de Vida is accessible year-round by road. Infrastructure in the area includes access to a deep sea port, trained labor pool, and a gas pipeline extension from the town of Pocitios to the Fenix operation which lies 24 km from Sal de Vida. The pipeline is designed to bring natural gas to the region’s mining and industrial operations; currently, a 20-kilometer spur extension to the Sal de Vida operation site is in the planning stages.

Amongst the world’s highest quality lithium brines

Three key aspects of the lithium brine chemistry at Sal de Vida make it one of the highest quality lithium brine developments in the world:

  • High lithium content—essential for large-scale production
  • High potassium yields— significant potash credits reduce operation costs
  • Low magnesium/lithium ratio—low impurities reduce costs and yield higher quality product

“Higher lithium grades support the potential for lower capex developments and better operating margins while low impurity levels support lower production costs,” noted Canaccord in a research report. “GXY’s Sal de Vida development project ranks well in both metrics, being second to only FMC’s Salar de Hombre Muerto in terms of grade, while the project has among the lowest Mg:Li ratios in the peer group.”

Reserve Estimate and Definitive Feasibility Study

Galaxy Resources completed a maiden reserve estimate on Sal de Vida in April 2013.

Galaxy Resources - Strongly Positioned for a New Lithium Era

Based on the reserve estimate, the 2013 Definitive Feasibility Study (DFS) estimated a pre-tax net present value of US$645 million (US$380 million post tax) at a 10 percent discount rate. The study showed that the project has the potential to generate total annual revenues of US$215 million and operating cash flow before interest and tax of US$118 million per annum at full production rates.

Galaxy Resources - Strongly Positioned for a New Lithium Era

The DFS assumed a lithium carbonate price of US$5,500 per tonne. However, lithium prices have shot up significantly since the 2013 study with prices now well above $US10,000 per tonne. “Looking at the transactions in the China market in recent months, large volume lithium pricing has reached close to $13,000 per tonne, with off-contract small volume pricing nearing $19,000 – it looks like we have a new normal in lithium pricing now,” states Tse.

In light of the surging growth in lithium prices since the completion of the study, Galaxy Resources is revisiting the financial projections in the DFS including price and cost assumptions. Surging lithium prices coupled with the 30 percent devaluation of the peso and abolition of withholding taxes in Argentina is likely “to yield a much more attractive and compelling set of economics going forward,” added Tse.

Sal de Vida has all the necessary environmental approvals in place and is fully-permitted through to construction. Galaxy Resources has been in discussions with potential strategic joint-venture partners at the project level, with the objective that a partial divestment of a minority stake at the project level could essentially finance the equity component required to advance Sal de Vida through to construction.

James Bay: Spodumene Deposit in Quebec, Canada

The James Bay lithium spodumene project is located in in the mining-friendly jurisdiction of northwest Quebec, Canada about two kilometers south of the Eastman River and 100 kilometers east of James Bay. The region is known for its low energy costs and good infrastructure. Galaxy Resources believes the James Bay project represents an opportunity to capitalize on long-term lithium demand growth in the North American markets.

The exploration-stage project contains a resource estimate of 11.75 million tonnes indicated resources grading at 1.30 percent lithium carbonate and inferred resources of 10.47mt grading at 1.20 percent lithium carbonate. The deposit remains open at depth and along strike with the potential to increase the size and grade of the resource. The lithium pegmatite deposit lies near surface and modelling indicates the potential for open-pit mining.

General Mining has the option to earn a 50 percent interest in the James Bay project through expenditures of US$5 million directly on the project over three years from the date of signing the agreement, US$2.5 million must be committed in the first 2 years. In September 2015, Galaxy Resources announced that work for a definitive feasibility study would re-start in 2016.

Management

Martin Rowley — Independent Non-Executive Chairman

Martin Rowley was a co-founder of TSX and LSE-listed First Quantum Minerals Ltd and is currently that company’s Executive Director, Business Development. First Quantum is one of the world’s largest copper production companies and the owner of the Ravensthorpe nickel project in Western Australia with a market capitalisation of in excess of A$10 billion. He was previously non-executive Chairman and director of Lithium One Inc., which was acquired by Galaxy by way of a Plan of Arrangement in July 2012. He is also non-executive Chairman and a director of Forsys Metals Corp, a TSX-listed company in the uranium sector.

Anthony Tse — Managing Director

Anthony Tse has 20 years of corporate experience in numerous high-growth industries such as technology, internet/mobile, media & entertainment, and resource & commodities – primarily in senior management, corporate finance and M&A roles across Greater China and Asia Pacific in general. His previous senior management roles include various positions in News Corporation’s STAR Group, the Deputy General Manager of TOM Online (previously listed on NASDAQ), Director of Corporate Development at Hutchison Whampoa’s TOM Group (listed on HKSE), President of China Entertainment Television (a joint venture between TOM and Time Warner), and CEO of CSN Corp. He is a Fellow of the Hong Kong Institute of Directors (HKIoD) and a member of the Hong Kong Mining Investment Professionals Association (HKMIPA).

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