Some further information leaking out that puts a very big ? on GXY in 2019 and a very big tick to the shorters aspirations.
Mt Cattlin output lower than expected: SC production of 33.8kt was a miss against CGe of 40kt. The variance is attributable to lower-than-expected recoveries due to continued processing of ore from 2SW pit, which despite the increase in grade, contained more metallurgically complex mineralisation (lepidolite). Sales of 39.7kt were in line, reflecting a reduction in unsold inventory from the SepQ to a reported ~8kt. The Yield Optimisation Project (YOP) is nearing completion with improved recoveries and grades expected from Q1'19.
DecQ margins lower on higher costs; margins to remain pressured on lower pricing in 2019: We estimate total cash costs of +US$600/t in the DecQ, with the increase QoQ driven by higher material movements and lower concentrate production. While we expect costs to fall as production recovers, expectations of lower SC pricing in 2019 (no specific guidance provided) could see lower margins a continued theme in 2019. Based on our understanding of current market prices, headline pricing could fall by ~US$200/t YoY.
Outlook - 2019 guidance conservative? Q1'19 guidance of 40-45kt is below our prior estimates, due to a more gradual ramp up of recoveries following completion of the YOP. Full year 2019 guidance is set at 180-210kt, ~11% below prior CGe. That said, higher plant throughput and recoveries on the back of the YOP could suggest the lower end of the range is conservative. Given recent performances at Mt Cattlin, this conservatism is probably warranted. Revisions to our model assumptions see our CY19 SC estimates 7% lower to 201kt.
Balance sheet - POSCO deal proceeds to hit in Feb'19: Cash and investments were lower QoQ to US$41.1m (SepQ US$54.7m). A blow out in YOP capex, prepayment of Argentina taxes and transaction costs (~US$11m), and mark to market of equity investments were the main drag on cash flow. An expected +US$270m in net proceeds from the POSCO transaction is now due in the current quarter.
Sal de Vida - much uncertainty... GXY has extended the strategic partnership process to further evaluate offers, and are now also assessing "alternative processing technologies". In our view, this leads to significant uncertainty around the project timeline (we had previously assumed FID in H1'19 and first production in early 2022), with management not providing any firm guidance for timing of FID and commencement of construction. Moreover, we see significantly higher execution risk should GXY opt for non-conventional brine processing (notwithstanding that it would significantly increase development lead time through the need for additional testwork and potential permitting changes). In the interim, we have revised our assumed project timeline which sees a ~12 month delay to first production to 2023.
1. Lepidolite issues again causing met/recovery problems, puts a shadow on reserve upgrade.
2. Total cash costs (the one they never disclose) estimated above $US600 in Dec Q.
3. Pricing could fall ~$US200 p/t YOY, so successful YOP is essential ASAP.
4. Blow out in YOP capex leading to lower cash in bank
5. Little future guidance by management for SDV, risk increasing exponentially here with alternative processing techniques being looked at, timeline blowouts probable and as I have said quite a few times the likehood of huge cost blowouts here are almost 100%. All that $US270 will be needed and some.
People wondering why shorts aren't letting up, there's your reasons.
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