SMOKING HOT LITHIUM STOCKS (fka CRE.V SNET)

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Why This Lithium Stock Is Up 240% This Year
Galaxy Resources has paid down debt and is benefiting from growing demand for electric vehicles.

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By DANIEL SHANE
May 6, 2016

Galaxy Resources’ Mt Cattlin spodumene project, located two kilometres north of Ravensthorpe in Western Australia.
Three years ago Galaxy Resources (ticker: GXY.AU ) was between a rock and a hard place. The Australian lithium miner was saddled with huge debts and costly delays at projects in Western Australia and China.

“We’d basically run out of capital,” recalls Anthony Tse, a former media executive who had just landed the gig as managing director. “We were bleeding a lot of cash, production was behind schedule and a lot of that debt was falling due.” The company owed AUD200 million at the time to creditors including Chinese banks and via convertible bonds. What followed was a painful period of consolidation and cost-cutting, including the sale of its lithium processing plant in Jiangsu and mothballing of its Mt Cattlin project near Perth, Western Australia.

Today with the books more or less balanced Galaxy has re-started production at Mt Cattlin, with lithium carbonate prices soaring amid vigorous demand for lithium-ion batteries, which are used to power electric vehicles. Galaxy shareholders look like they’ve struck gold, too: The stock’s up a staggering 1,100% in the last year. The stock has gained 240% just this year.

Tse tells Barron’s Asia Galaxy began exploring how to restart Mt Cattlin early last year as “the lithium market was tightening,” but the company lacked resources to get the mine going again. That led Galaxy to bring on board Australia’s General Mining ( GMM.AU ) as an equity partner in the venture. General has put about AUD25 million into getting Mt Cattlin off the ground again. Tse says the mine can produce 200,000 tons of lithium concentrate – or spodumene - a year, although initial output will probably be around 150,000 tons. He figures the mine will generate annual cash flow of least AUD40 million. “That will have some impetus on future earnings growth,” Tse says.

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Mt Cattlin’s already secured orders from China: In March Galaxy and General struck a deal to sell 60,000 tons to two Chinese lithium converters for USD36 million. They’ll sell a further 120,000 tons to the same buyers next year at a price that depends on the market. That former price pegs Mt Cattlin’s lithium concentrate at about USD600 a ton, but Tse thinks there’s wiggle room for that to move higher. A quick chemistry lesson: Before lithium concentrate can be used in applications like lithium-ion batteries, it needs to be converted to lithium carbonate. One ton of lithium carbonate requires about eight tons of lithium concentrate. Right now converters sell lithium carbonate at about USD13,000 a ton, which means there’s some big margins emerging from that process. “A lot of the margin is going to the converters,” Tse admits. “But we didn’t want to be too aggressive [on price] in the first year of ramp up” in the event of any production hiccups.

Galaxy Resources could also benefit from being one of the newer sources of supply. As Canaccord Genuity analyst Reg Spencer points out, Mt Cattlin is one of only two new sources of hard rock lithium coming online in the next couple of years. Galaxy’s Tse argues lithium miners have dawdled in ramping up production to meet demand, leading him to forecast the lithium carbonate market will be undersupplied for at least the next five years. His arithmetic suggests demand will rise by 20,000 tons annually from its current 160,000 tons a year. “I can count all of the projects on one hand” that are coming online in that time, Tse says. These include Rockwood Lithium’s La Negra brine project in Chile, as well as Orocobre’s ( ORE. AU ) Salar de Olaroz mine in Argentina, where production is being ramped up. “Even if all of these come online and they hit the capacity in the timeline they say they will, we’re still looking at a 30% to 40% supply gap for five years,” Tse reckons, adding that prices of up to USD20,000 a ton for lithium carbonate “are the new normal.”

Tse points to sales of electric vehicles, particularly in China, as driving the run-up in prices. Choking air pollution has led China to give top billing to the environment when it comes to policy-making. The country wants to get 20% of its energy requirements from non-fossil fuels by 2030. Last year, around 380,000 electric vehicles were sold in China, many of these buses for public transportation. China plans to have five million electric vehicles on the road by 2020, while India is targeting six million. Meanwhile, Tesla Motors’ ( TSLA ) new Model 3 sedan - prices start at $35,000 - is accelerating the company’s moves to drive widespread adoption of electric cars. Tesla’s gigafactory plans to produce 500,000 lithium-ion batteries a year.

Galaxy’s other major going concern is its Sal de Vida lithium brine project in Argentina, located in South America’s so called ‘lithium triangle.’ Tse wants the project to begin production in late 2018 or 2019. First though, Galaxy will draw up a new economic feasibility study this year. Tse expects capital costs to have fallen significantly because of the weaker Argentine peso and removal of some levies by the country’s new pro-business leader. Sal de Vida will be financed 60%-70% by debt and the rest equity, which could involve selling down a 20% to 30% stake in the project. Galaxy says Sal de Vida’s production capacity could reach 25,000 tons of lithium carbonate and generate $215 million in revenue annually.

Longer-term is Galaxy’s James Bay hard rock exploration project in Canada. Tse the company will look at doing economic feasibility studies later in the year. The idea is to do a “copy-and-paste” of Mt Cattlin, which may include selling down equity in the project. “It depends on the number,” Tse says.


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