Galaxy Resources stocks soar in lithium boom
Galaxy Resources managing director Anthony Tse awaits the first shipment from the company’s new lithium mine. Picture: Colin Murty
It’s an unusual thing to say about the company that was one of the best performing of the top 200 stocks of 2016, but this year was a tumultuous one for Galaxy Resources.
The lithium miner’s 356.5 per cent share price gain over the course of 2016 made it the one of the best mining stocks performers within the ASX 200, behind resurgent miner Resolute Gold and media interest APN News & Media.
Underscoring the broader mining revival, Galaxy shares surged over the first six months on the back of a wider wave of excitement around all things lithium, catapulting its market capitalisation beyond $1 billion. Galaxy shares rocketed up from 13.3c each to 51.2c over the course of 12 months.
But the start of the new financial year was cruel to Galaxy, due to a combination of creeping scepticism about the legitimacy and sustainability of the lithium boom and, more specifically, teething issues as its Mt Cattlin mine in Western Australia’s south headed towards production.
The issues at Mt Cattlin proved particularly unsettling, given Galaxy’s previous incarnation as a lithium miner almost ended in tears due to elevated levels of mica, an unwanted contaminant, in the mine’s output. Having almost halved from its midyear highs, Galaxy then enjoyed a late-year surge back towards its previous levels as it sorted out those Mt Cattlin issues and surprised the market with some stronger than expected pricing for its output.
In mid-December, it announced it had agreed to sell 120,000 tonnes of lithium concentrate it expects to produce in 2017 at a price of up to $US905 ($1250) a tonne. To put that into context, Morgan Stanley analyst Brendan Fitzpatrick had been modelling an average lithium concentrate sale price for 2017 of $US550 a tonne.
That sales figure is arguably the strongest evidence to date to back up the argument from Galaxy managing director Anthony Tse that the lithium market’s strong run will continue. The chorus from the lithium sector has been a constant one: that the rising demand for electric vehicles like the Tesla, and, beyond that, home power storage systems will drive a sharp increase in lithium demand for years to come.
Mr Tse points to the electric vehicle targets mandated by various governments around the world, noting that hitting those targets would require vastly more lithium carbonate than is currently produced worldwide. Even if those governments only met half those commitments, the resulting lithium demand from those new vehicles would be more than double the world’s current annual output. The counterpoint from the sceptics is that the abundance of lithium projects around the world means the supply response will inevitably swamp that rising demand, potentially sooner rather than later.
Mr Tse notes that while more than 110 ASX-listed companies have moved into lithium exploration in the wake of the lithium boom, only a handful of projects worldwide have made any meaningful progress towards development. Of those advanced projects, he says, they require around $US2bn in funding to be built. So far, however, less than half a billion in funding has been secured.
“For the time being, while you see robust demand and robust pricing, sooner or later those cheques will get written,” he told The Weekend Australian. But even if someone wrote a $1.5bn cheque today to fund those projects, they would still need to be developed.
The new wave of hard-rock spodumene projects won’t hit full production for two to three years, while the bigger brine-based lithium projects will take even longer.
“That assumes you don’t get any project delays and you don’t have any capex overruns, which as we all know happens more often than investors wish,” Mr Tse said.
Galaxy’s performance in 2016 cannot be dismissed as simply a function of the investor frenzy around lithium given it comfortably outpaced its local lithium rivals. Orocobre, which was overtaken by Galaxy as the biggest locally listed lithium play, gained 80.4 per cent this year. Neometals doubled, while Pilbara Minerals managed a 43.7 per cent jump.
Mr Tse, who has been with Galaxy through its brush with death during its ill-fated first round of mining at Mt Cattlin in 2012, believes the company is in a sweet spot where there is very little spare lithium production available to buyers. “Having come through three of some very hard years, we’ve come out into that market where there’s not that much competition around and there’s a lot of demand that needs to be satiated even as end user demand is ticking up,” he said.
They also shape up to be particularly profitable. Hartleys analyst Trent Barnett has Galaxy generating more than $180 million in net profit over 2017 and 2018 calendar years, while Canaccord Genuity’s Reg Spencer forecasts $200m in free cash flow over the same timeframe.
