Seeking Alpha article, page-41

http://seekingalpha.com/article/3983354-galaxy-resources-emerging-leader-lithium-industry

Yet another endorsement and a great summary of the current state of play.

(Apologies if posted previously)

Galaxy Resources: An Emerging Leader In The Lithium Industry


Global demand for lithium is accelerating.

Galaxy Resources is an underfollowed lithium player that has undergone major financial restructuring.

The company has significant intellectual property which the market underestimates.

Lithium - a light, soft, silver-grey, highly reactive and flammable metal element with high energy density as well as a great degree of safety while handling energy release - has become a hot commodity this year as demand for lithium-ion batteries from electric carmakers and energy storage producers is gaining momentum. Last year in December, Goldman Sachs called Lithium 'the New Gasoline' and highlighted the importance of EVs' adoption to the growth in lithium demand. Another strong tailwind for lithium demand stems from the higher utilization of renewable energy sources. Several studies have already pointed out that alternative energy sources will no longer be alternative, but become main, which raises an urgent need for energy storage.

The global Lithium industry has long been controlled by three dominant players - Rockwood Holdings (acquired by Albemarle (NYSE:ALB) in early 2015), Sociedad Quimica y Minera de Chile S.A. (NYSE:SQM) and FMC Corp. (NYSE:FMC). In recent years, however, the lithium market has become significantly more fragmented and a number of new producers appeared. In addition, portfolios of the above-listed entities are well-diversified across other chemicals, so the companies cannot be considered as pure lithium plays anyway.

Among the (old) new lithium industry entrants, some (Bacanora Minerals (OTC:BCRMF), Rare Earth Minerals (OTC:RARMF) and Pure Energy Minerals (OTCQB:HMGLF)) have already managed to sign supply agreements with Tesla Motors (NASDAQ:TSLA), while others such as Orocobre (OTCPK:OROCF) are considerably boosting production. However, there is one hidden gem that is still heavily underfollowed and could become the winner of the progressing lithium boom.

Galaxy Resources Limited (OTCPK:GALXF) is an Australian-based company that has gone through comprehensive restructuring initiatives and disposal of non-performing assets. Under the new management, the company's financial position has substantially improved, which gives Galaxy the flexibility to take advantage of opportunities in the rapidly-growing lithium market. Last month, the company announced a merger with its joint venture partner General Mining, enhancing equity and capital markets profile with a combined pro-forma market capitalization in excess of A$700 million. Nevertheless, the greatest Galaxy's assets are intangibles, which the market really misses.
Source: Galaxy's corporate presentation,
March 2016

Management Turnaround

The current management and board was appointed in 2013 after major shareholders pushed for a change due to numerous delays in the development of the Jiangsu lithium carbonate plant in China, production shortfalls and budget overruns. Anthony Tse, originally non-executive board member, became the key executive director and successfully managed to transform Galaxy's financial statements.

Shortly after the appointment of the new board and management, a special committee consisting of another executive director (Charles Whitfield) and two non-executive board members (Martin Rowley - chairman of the board - and Jian-Nan Zhang) was established to supervise the financial restructuring and strategic transition. More than A$110m of convertible bonds and Chinese bank debt were restructured and new equity worth of A$37.5m was raised. Last year, the company effectively completed the divestment of the Jiangsu plant, which removed A$101.5m of debt from balance sheet. In total, Galaxy's net debt has been reduced from peak levels of A$207m to the current A$20m.

Salt of Life, James Bay and Mt Cattlin

The company's flagship project - the Sal de Vida (Salt of Life) lithium and potash brine - is located in Argentina in the area known as the 'Lithium Triangle' where more than 60% of the world's annual production of lithium comes from. Galaxy first acquired an interest in the project as a consequence of its merger with Lithium One in 2012 and now fully owns all assets related with the project. It is estimated that the brine contains a reserve of 1.1 million tonnes of high-quality LCE (lithium carbonate equivalent) and 4.2 million tonnes of KCI (potassium chloride equivalent), which supports the envisaged 40-year low-cost lithium and potash production...

At present, the project is still in the stage of development and management is revisiting the DFS (Definite Feasibility Study) with respect to improved macroeconomic conditions and lithium carbonate prices. The first production is expected to occur at the turn of 2017 and 2018. The full specification of the project is available on the company's website.
Whereas Sal de Vida is a world-scale project, Galaxy has another two undertakings that are supposed to serve particular geographical segments. The first of them - James Bay - is a hard rock lithium project located in northwest Quebec with a focus on meeting the rising lithium demand in the North American market. The work on DFS is expected to begin in the second half of this year.
The only project with secured offtake of production is Mt Cattlin, a spodumene (lithium concentrate) and tantalum hard rock mine, located in Ravensthorpe, Western Australia. First deliveries to the company's Chinese customers of this year's 60,000 tonnes of spodumene are scheduled to take place in July or August and binding commitments for the delivery of 120,000 tonnes in 2017 are instituted.

General Mining Merger Deal

On Monday, 30th of May, Galaxy Resources Limited and General Mining Corporation Limited announced a definite takeover bid implementation agreement to merge the two companies. Under the friendly off-market takeover offer, Galaxy will acquire all of the issued shares of General Mining that it does not already own. General Mining shareholders will receive 1.65 new Galaxy shares for each General Mining share, which represents a 9.4% premium to the 10-day volume weighted average price to Wednesday, 25th May.
Following implementation of the takeover offer, which is expected to close during the third quarter this year, General Mining will become a wholly-owned subsidiary of Galaxy. Current Galaxy and General Mining shareholders will hold 71% and 29% respectively of the combined group, which will emerge as one of the Australian Securities Exchange's largest lithium listing, with a market capitalization of more than A$700m.
"We are extremely pleased that the joint venture arrangement we entered into with General Mining in 2015 has resulted in a merger proposal that makes sound strategic sense and, importantly, gives the shareholders of both Galaxy and General Mining the opportunity to participate in the upside of a merged lithium company of global significance.'' - Martin Rowley, Galaxy's Chairman
As with new deals, management's appetite for mergers and acquisitions usually gets up, it is reasonable to expect that more consolidation efforts might arise in the foreseeable future.
Strong Networks In The APAC Region
One thing that sets Galaxy apart from its competitors is its intellectual property, which the market underestimates. Galaxy has built significant customer relationships, especially throughout Asia where demand for lithium is predicted to growth at the fastest pace.
In China, the government continues encouraging green technologies, with particular emphasis on electrification of transport. By 2020, Chinese authorities target city transportation fleets to hit 200,000 electric buses and 5,000,000 electric vehicles on roads in total.

More than 70% of lithium carbonate production in China comes from Talison, a company controlled by Tianqi Lithium Industries and Albemarle. This superior position on the Chinese lithium market recently made a case for Talison's management to pursue a strategy of limiting spodumene supply, which substantially contributed to the surge of local lithium prices over the past few months. As a result, lithium converters in China started looking for deliveries from alternative suppliers from close locations such as Galaxy's Mt Cattlin in Australia.

Although Galaxy lost direct exposure to the Chinese market with the divestment of Jiangsu assets, key people possessing extensive technical expertise and strong connections in Asia remained with the company. This will very likely translate into figures of Galaxy's bottom line and market position over the next years.
Share Price Catalysts

• Mt Cattlin production ramp-up - recent restart of Mt Cattlin operations along with increased prices of spodumene will improve cash flow and net income already this year.

• Accelerating demand growth for lithium - adoption of hybrid and electric vehicles, energy storage systems and continued increase in demand for lithium-ion battery consumer and portable electronics require far greater lithium inputs than several years ago.

• Potash and Tantalum prices upside - even though potash and tantalum make up only a minor part of Galaxy's business, potential increases in demand for these elements would expand the company's revenue.

• Financial strength - the new management successfully accomplished the reduction of net debt, which returned the company the ground necessary for further development of its projects.

• Considerable technical know-how, industry relations and established customer relationships - Galaxy has built a vast network of lithium industry experts, strategic partners and customers. Some of them come from discontinued operations in Jiangsu and others have been acquired during discussions over Sal de Vida

• Price - lithium carbonate, spodumene, potash, tantalum price volatility directly affects intrinsic value of the company; the greatest risk.

• FX - since major listing of Galaxy's shares is on the Australian exchange, prices of lithium are usually expressed in USD or RMB per tonne and Galaxy operates projects in three different countries, investors should be aware of foreign exchange risk as well.

• Geopolitical - performance is also sensitive to government issues in countries where Galaxy's assets are located; that is Argentina, Australia and Canada.

• Technological advances - new technology that would be able to compete traditional lithium-ion batteries effectively.

• Eventual delays and cost overruns - two out of three of Galaxy's projects are currently in the development stage.

Valuation

Based on the DFS (definite feasibility study) from April 2013, the company estimates the after-tax net present value of the Sal De Vida project at AUD/USD rate of 1.03 to be A$369m. However, the Australian Dollar has appreciated since that time to levels around AUD/USD 0.70, which implies NPV of A$543m according to the company's corporate presentation from March. Due to a substantial increase in prices of lithium carbonate, Galaxy plans to publish a revised version of DFS by Mid 2016.
In autumn last year, Mt Cattlin was valued in an independent review of General Mining's financial model by Entech Mining Consultants at A$247.5m with respect to reference spodumene pricing of US$445/t. Nevertheless, the spodumene pricing for Mt Cattlin agreed offtake this year is US$600/t, which suggests a project NPV well above A$400m at an exchange rate of AUD/USD 0.75 according to the sensitivity analysis of the report. Assuming James Bay's value is negligible at this stage, the total base NPV of all of Galaxy's projects is A$943m (A$543m Sal de Vida + A$400m Mt Cattlin). Dividing this figure by the number of shares outstanding (1.284B), we arrive at the final per share base NPV of 0.73 AUD or equivalently 0.54 USD (~40% upside potential).

Investment Summary

Galaxy Resources is probably the best bet on the booming lithium industry. Successful financial restructuring by the new management provided the company capacity necessary for the development of its flagship lithium and potash project in Argentina with an estimated useful life of more than 40 years. On the other hand, the recently restarted Mt Cattlin operations will secure near-term cash flows that are critical for the business ramp up in the following few years.
Close connections to customers and industry professionals in the APAC region are invaluable assets that can help the company get ahead of the competition. Moreover, definite feasibility studies of Galaxy's projects suggest that the stock is currently trading at attractive levels. However, here it is important to note that the valuation of the company is highly dependent on lithium compounds prices and therefore is subject to change.