De-risking delivers value in Galena
Within two years of listing and now backed by Japan’s Toho Zinc, Galena Mining (ASX: G1A) is nearing construction at its Abra base metals project in Western Australia, where it’s forecast to deliver the highest-grade lead concentrate available, globally
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The fully-permitted project offers sector-leading returns, has all the equity funding in place and is a very low-risk investment through the construction phase, Galena Mining managing director and CEO Alexander Molyneux explains.
While he admits lead is "not a sexy EV metal", it is set to benefit from increasing electrification; and thanks to Galena's thorough de-risking process, plus Abra's project metrics and scale, it has attracted high-calibre support - even before July's release of an outstanding definitive feasibility study.
The DFS spelt out high return metrics, including a pre-tax NPV of A$553 million and IRR of 39% on pre-production capex of $170 million.
"However, it's also got the key benefits of reasonable mine life (16 years) and substantial scale ($114M a year of EBITDA in steady-state operations)," Molyneux points out.
"Those are key because bank financiers don't just look at the return metrics, they see absolute scale and mine life as key de-risking elements of a project."
Abra's location in Western Australia Abra, which sits on a mining lease in the Gascoyne region, will produce a high-grade, high-value lead-silver concentrate grading 75% lead and 200g/t silver, for an average 95,000t of lead and 805,000 ounces of silver annually.
"It's unique in that it's the highest-grade lead concentrate that will be available globally and should attract pricing terms that represent a premium to benchmark," Molyneux said.
"That's more upside though as well, because we did not assume any premium in the DFS calculations."
Before the DFS was released, Galena had already garnered support from Toho Zinc, which is investing $90 million for a 40% stake in Abra, plus the right to purchase 40% of Abra's product on arm's-length, benchmark terms.
Toho is a leading Japanese smelting company and also owns the zinc, lead and silver miner, CBH Resources, in New South Wales.
Toho has put in $30 million for a 13.33% interest in Abra and will tip in the remaining $60 million when Galena signs a project financing debt facility.
Importantly, the investment means the equity portion of the project financing is done, with Toho's money to largely stay in the joint venture company, AMPL, for Abra's project development capital expenditures.
"Secondly, the project has been endorsed after a significant due diligence by an experienced customer and miner," Molyneux said.
Galena also attracted a $10 million investment at 40c per share from Australian billionaire Tim Roberts earlier this year, initially through his Singapore investment vehicle, Kingfisher Capital.
The investment has since been restructured to be held in Roberts' name, with Molyneux saying he expected it to be a long-term holding.
"All feedback from them is that they're very happy with the progress we're making," he said.
Between the Toho transaction and placement, Galena has brought in about $100 million in equity.
"The DFS for Abra (published in July) has an NPV using spot prices of $553 million and so Galena is trading at quite a discount to its attributable value," Molyneux said.
"Particularly when you consider we're fully permitted and have concluded native title arrangements, etc."
The equity position has Galena well-placed for project financing discussions, with six leading commercial banks signing confidentiality agreements to review the project and pitch debt earlier this year.
"We picked one leading mining-experienced bank to act in a coordination/arrangement role," Molyneux said.
"That bank was mandated in July and we have commenced the due diligence and discussion of legal structuring for the financing.
"It takes time to go through these processes but by all accounts, the feedback we have had so far indicates the project has plenty of debt leverage and the amount of equity we have already put away, combined with the projected cash flows, is seen as a very attractive proposition by the banks."
Galena is already taking steps towards its targets of construction later this year and production in 2021, with preparatory work underway.
Abra's proposed underground mine development The company has bought its first 80-camp accommodation units, drilled production water bores and ordered some long lead-time items like the primary ventilation system for the underground mine.
"Right now, we're looking to commence full-scale construction on site by the end of this year," Molyneux told RESOURCEStocks.
Beyond Abra, Galena also has exploration assets awaiting attention, including a suite of tenements 20-80km to the west which have some geophysical anomalies "that look a lot like Abra did back in the day," Molyneux said.
Being well-funded, he said Galena would look to continue exploration but would also consider earn-in and joint venture options after receiving some approaches.
However Abra, which Molyneux describes as probably the best Australian base metals project of any reasonable scale at the post-DFS/construction stage, is firmly centre stage.
Its development timeline looks set to meet a market facing a supply deficit and a steady demand, despite lead not necessarily grabbing investors' attention.
"Not that many people are interested in lead in the investment space because there are more listed copper or nickel companies and it's not a sexy EV metal," Molyneux said.
"However, it has some really interesting market dynamics.
Massive galena mineralisation in Abra drill core "The market for lead is still growing. It's mainly used in automotive batteries and contrary to popular belief, EVs still have lead acid batteries to run their back up safety systems and to run the battery management computer that monitors the lithium-ion battery.
"On the other hand, lead benefits from increased electrification and use of batteries in stationary applications like mobile phone towers etc.
"Independent experts like Wood Mackenzie expect the lead market to continue to grow through 2035 at around 2.5% per annum."
He said the big dynamic for lead was simply lack of supply, with LME inventories at decade lows.
"I think the fact we had Toho come in the way they did out of a process where we had a lot of other strategic parties goes to show how ‘in demand' lead supply is," he said.
The market is also starting to take note, with Galena's share price more than doubling since the start of this year.
"Frankly despite the run the stock had, it's still really cheap particularly when you consider we have raised the equity needed to build the project so you don't have the dilution risk a typical project in the pre-construction phase would have," Molyneux said.
"We're trading at around a 60-70% discount on where we would be if we were trading at 1.0x NPV per share.
"We did the Toho deal when the share price was 17c and the Toho deal still represents a premium to where the shares are trading now."
Catalysts for a Galena rerate in the second half of 2019 alone include concluding non-Toho offtake, potentially proving up the premium value of the concentrate, further drilling and a resource/reserve update, inking the project finance loan and starting full-scale construction.
Galena CEO and MD Alexander Molyneux Molyneux, who has 20-plus years in the industry and was at the helm of the recent Paladin Energy turnaround, said Galena had a great board and management team who had experience building Abra-like projects.
"[Director] Tony James was hugely successful in building Higginsville for Avoca until that got taken out in a takeover and Troy Flannery, CEO of our Abra JV company, used to be a GM-level experienced miner at Newcrest," he said.
"I'm really looking forward to getting moving with the build.
"Abra is projected to make $114 million of EBITDA in 2022 and I can't wait to get there."
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