Why the GXY share price should rise tomorrow, page-27

Here's MacBanks take on the GXY results...... This is why we are not going anywhere too soon.

Event
 Mt Cattlin was stronger than expected in 1QCY19.
GXY has ended the search for a partner to develop Sal de Vida with no deal being done.
Impact
 Mt Cattlin strong on costs, recovery soft: GXY produced 42kt of spodumene concentrate, in line with our estimate, while C1 costs of US$453/t were a 17% beat. Recoveries were weak at 51% against our 55% expectation offset by 8% stronger grades. GXY had been targeting recoveries of >70% post commissioning of the Yield Optimisation Project (YOP) which should materially improve recoveries. It was noted on the call that GXY intends to prioritise product grade conceding the >70% recovery target could be at risk.
 We are less confident for Sal de Vida: GXY will develop Sal de Vida itself after ending the search for a strategic partner with no deal being done. We see Sal de Vida as increasingly uncertain given recent muted pricing and generally longer development times for brine resources. We lift our WACC for Sal de Vida from 10% to 14% which reduces our valuation from A$395m to ~A$90m.
Earnings and target price revision
 We slow our recovery improvements to a reduced long-term expectation. This lowers CY19 EPS by 31% and 9% in CY20-21. Higher debt loading for Sal de Vida lowers FY22 EPS by 27% while interest capitalisation lifts FY23 EPS by 10%. We lift Sal de Vida’s WACC from 10% to 14% due to rising uncertainty. This results in a 29% cut to our target price from A$2.10/sh to A$1.50/sh. We downgrade our recommendation from Neutral to Underperform.
Price catalyst
 12-month price target: A$1.50 based on a Sum-of-the-parts NPV methodology.
 Catalyst: delivering on recovery improvements at Mt Cattlin and providing a pathway and timeline for Sal de Vida’s development are key, in our view.
Action and recommendation
 Downgrade to Underperform from Neutral. While production was in line and costs were better at Mt Cattlin, weak recoveries remain a concern given the Yield Optimisation Project (YOP) coming online. The YOP was designed to lift recoveries to >70%, however, GXY noted this could be optimistic given the priority is shifting to better concentrate grades. Sal de Vida is increasingly uncertain, with the search for a development partner ending with no result. While GXY intends to advance the project by itself, we believe funding could be difficult to source during the muted market conditions that currently prevail.