Having asked a few questions in yesterday's call and slept on it, I have a few thoughts I would like to share.
On the subject of Sal De Vida the presentation says: larger group well positioned to accelerate development of a single stage 32ktpa LCE Sal de Vida project
In the call I asked: What is the difference between Galaxy proceeding as a single stage at Sal De Vida v's Orocobre being involved? What benefit is Orocobre bringing to that project that isn't currently available?
The response from Simon Hay indicated that Galaxy didn't have the expertise to be able to develop Sal De Vida and it was noticed last year by @Sjlasx that it appeared that Orocobre stopped their expansion at Olaroz, perhaps to assist Galaxy build the pilot plant. Whilst Galaxy had indicated once they received the capital raising funds that they could proceed at Sal De Vida and wouldn't need a partner, seeking to prove value in the project before considering a sell down.... I am perplexed why the company then decided to merge under what appears to be distress.... Yes, the deal is that bad.
Question 2: It may have already been mentioned, can you please clarify how the merger value was worked out as it seems to disadvantage Galaxy due to Orocobre only currently producing 32% of the LCE value of the merged entity. 25,000 verses 12,000. Also Galaxy receive a significantly better margin.
With this question I had shifted away from the 40ktpa LCE value shared on page 11 of the presentation. (Which was really badly laid out, who starts a timeline on the right? )
I didn't see a breakdown of the LCE value, but rather a footnote that says the combined LCE of Olaroz and Mt Cattling is 40,000tpa LCE.
Mt Cattlin Operating at 200,000tpa would be roughly 25,000tpa LCE and the quarter just gone what we know is that costs for production are $384/t with pricing for this quarter in excess of $600/t providing a margin at minimum of $216 per tonne. We have seen some spot pricing up around $700 reported so there is a chance that the margin is $316.
The announcement by Orocobre yesterday indicates their cost per tonne some of the best I have ever seen it, at $3867 with expected forward pricing of $7400 which would indicate a margin of $3,533
A simple comparison would require that for each tonne of lithium carbonate sold by Orcobre that Galaxy would need to be receiving $825 per tonne.
Though the comparison should be based on production, and also ownership in that production, in which case we can see on page 10 of the presentation that Orocobre own 66.5% of Olaroz, of which their entitlement to margin per LCE is $2349.45 which would only require Galaxy to be receiving $677.68
In my question I indicated that Galaxy was achieving 25,000tpa LCE and Orocobre 12,000tpa of LCE but the true ownership of LCE value of their production is just under 8,000.
The difference of LCE ownership value I don't believe has been factored into the deal that has been made, otherwise we would see a merger of equals with Orocobre shareholders receiving less than 25% of the business based on those values.
If we are to consider profitability using the margins multiplied by the LCE values we now know.
Orocobre - 8000LCE x $3533 margin = $28.3 million.
Galaxy - 25,000LCE x (8 x $216margin) = $43.2 million
You will note that I have used the lowest margin for Galaxy based on $600 per tonne pricing and provided Orocobre the advantage of their claimed $7,400 pricing per tonne.
If I used the $677.68 thats $293 margin and based of 25,000 LCE thats $58.6 million per annum of profit
which is substantially higher to the Orocobre entitlement of $28.3 million.
I've seen comments about Naraha being fantastic to increase Orocobre's production... The reason for Naraha is because Orocobre struggled to produce battery quality material at Olaroz and needed to refinish elsewhere adding additional costs to the production..... The quarterly announcement that Orocbre issued yesterday indicates they are up from 34% to 47% yet their pricing is still crap at a few hundred less than $6,000 per tonne.
This is not a merger of equals. Orocobre have a history or poor performance at Olaroz along with hideous pricing. Orocobre's ownership in their asset is dwarfed by the profitability of Galaxy now that we are in a phase of pricing increasing.
I think that the Reg Spencer's and Howard Kleins of the world have sung praise to this deal because of the colourful flier, but have not sat down and reviewed the numbers. I don't think we should be willing to accept it is a good deal because someone else says it is.
Thats an interesting screen grab, because we have 2 new projects... and Orocobre trying to fix their f'up still. We know that James Bay LCE is 40,000 and Sal De Vida, adds 32,000LCE so this would allocate 8,000LCE to Orocobre, based on repairing what they didn't get right in the first place and is hardly mentionable.
All the LCE value come from Galaxy... not Orocobre.
One of the other things that Galaxy holders may want to be aware of is that Toyota is able to ensure that their ownership in Orocobre doesn't decrease by 15%, in which case once the merger completes, I believe they will then own 7% so Galaxy shareholders will have further damage applied to their investment when they return to their 15% ownership & diluting everyone else.
None of this is devaluing what the company might be, I just think that Galaxy management blinked first.
The deal does appear to bring all of the projects of Galaxy into the world of Toyota, in which case now for more supply Tesla & Volkwagen are going to need to look elsewhere, and that's only 2 car companies that will miss out.
Fingers crossed a better deal comes along or enough shareholders vote no and it is reworked more in Galaxy's favour.
GXY Price at posting:
$3.83 Sentiment: None Disclosure: Held
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