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Things are looking a little brighter for ASX-listed Galaxy Resources, which last week signed a binding share purchase agreement with Sichuan Tianqi Lithium Industries for the purchase of Galaxy’s Jiangsu lithium carbonate plant in China.
The transaction is valued at US$230 million, including cash considerations of $122 million and the assumption of $108 million in Chinese debt, and will leave embattled Galaxy Resources looking at a very different balance sheet when it closes. Specifically, with the closing of the SPA, Galaxy will see its balance sheet transition from material negative working capital to a “pro forma positive cash balance of approximately A$62 million.” That positive cash will enable the company to focus its efforts on the Sal de Vida lithium brine and potash project in Argentina, an asset it views as core from a position of financial strength.
Galaxy’s managing director, Anthony Tse, told investors that “[t]his transaction with Tianqi provides Galaxy with the opportunity to significantly strengthen its financial position and transform its balance sheet,” adding that moving forward, Galaxy will “continue to retain significant exposure to the lithium sector, through the Sal de Vida lithium brine project and with Mt Cattlin in Western Australia and James Bay in Quebec.”
The SPA should take about three months to complete.
Tianqi … sound familiar?
Investors familiar with recent action in the lithium market may recognize the name of the company that has agreed to purchase the Jiangsu plant. And with good reason.
Sichuan Tianqi Lithium Industries is part of Chengdu Tianqi Group, a private Chinese firm that is well on its way to becoming a world leader in new energy, new material and milking machinery manufacturing. It specializes in the lithium industry, a position that it improved in 2013 when it purchased Australian lithium company Talison Lithium.
With Talison under its belt, Chengdu has a hand in just about a third of global lithium supply. With Jiangsu, Chengdu will have a battery-grade lithium carbonate plant that will allow it to manufacture high-grade product for the market.
At full capacity, Jiangsu can produce 17,000 tonnes of battery-grade lithium carbonate per year, as per Galaxy’s website.
What about Mt Cattlin?
Galaxy Resources also owns the Mt Cattlin spodumene project in Western Australia. In mid-2012, the company opted to stop operations at the mine in order to focus on the Jiangsu plant. With Jiangsu now out of its hands, Galaxy believes that a logical step for the company is to put Mt Cattlin up for sale.
One analyst, however, doesn’t have such high hopes for the project’s resale potential.
Recent comments from Australian business analyst Tim Treadgold are far from optimistic. For instance, he believes that while it makes sense for the Australian miner to put Mt Cattlin up for sale, it won’t be easy. “I don’t know how you can sell something that doesn’t appear to have any value,” Treadgold told ABC.
The problem, Treadgold explains, is that hard-rock lithium mining in Western Australia is not as able to compete with the “softer, cheaper material coming from overseas.” Even Galaxy seems to have made that decision to a certain extent considering that it plans to focus on Sal de Vida.
Lithium market
For his part, Tse sees positivity ahead for the lithium market.
“The fundamentals for the lithium sector remain strong,” Tse told shareholders, adding that “[d]emand growth is robust with the consumer electronics sector continuing to set up, coupled with increased consumption in hybrid electric vehicles.”
Indeed, the lithium market seems to be gaining a little more attention lately, particularly following Tesla Motors’ (NASDAQ:TSLA) February announcement that it plans to build a $5-billion lithium-ion battery “gigafactory” in the United States. As Lithium Investing News learned from industry players in March, that news brought renewed positive sentiment to the market, particularly with regards to electric vehicle (EV) and lithium-battery demand.
Beyond EV and battery demand, Tse sees the “[m]arket share of other end user applications, such as power tools and energy storage, also continu[ing] to grow.” He continued, “[t]he increasing adoption of lithium technologies in multiple key applications continues to be driven by many government-led initiatives and policies worldwide.”
Securities Disclosure: I, Vivien Diniz, hold no investment interest in any of the companies mentioned in this article.
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