Canacord note Galaxy Resources (GXY-ASX) MarQ'17 report; maintain BUY, lowering target price to A$0.

Lowering Target Price

MarQ'17 report

GXY's MarQ was mostly in line with expectations, but given Mt Cattlin was in ramp up mode during the period, we look to the JunQ for production/costs/pricing that more effectively represent steady state. Beyond Mt Cattlin, we see a number of potential catalysts from development assets, the most important being an FID and confirmation of financing for Sal de Vida. We maintain our BUY rating for GXY, with our revised target price implying a potential return of 70%.

MarQ production lower, costs as expected: GXY reported spodumene concentrate production of 23.5kt, lower than CGe of 32.5kt due primarily to lower plant throughput during the production ramp up earlier in the quarter. With throughput now at nameplate, we continue to expect a significant lift in production in the JunQ. C1 costs of US$389/

t were broadly in line, but we note that this excluded any tantalum by-product sales (expected to commence mid'17). With the softer start to the year, our CY17 production estimates drop ~5% to 164kt.

Sales and cashflow in line - benefits of CY17 pricing should commence from the JunQ: Sales volumes (two shipments) were as expected at 23.5kt, with average pricing received of US$542/t reflecting minor penalties on 2016 deliveries and shipping costs. With 2016 commitments expected to be satisfied in the next shipment, operating cashflow should start to benefit from higher 2017 offtake product pricing (US$830/t for min. 5.5% Li2O). Reported cash was in line with expectations at A$40m.

Sal de Vida - pre-development activities in full swing, but we look for more clarity on FID and financing: GXY recently reported that pre-development works had commenced, including initial production well drilling, and mobilisation for construction of the pilot plant. While these activities are important from a de-risking standpoint, we note management commentary that JV/financing discussions for the project have progressed, and consider more detail around this aspect to be a more meaningful catalyst. We currently assume GXY completes a 15% project equity sell down as part of financing for the project in mid'17, with project construction commencing in earnest in 2018.

James Bay - development program underway: GXY has commenced its exploration and development plan for James Bay, including infill and step out drilling to expand/improve the resource (currently 22Mt at 1.25% Li2O), and feasibility studies for a potential 2Mtpa mining and spodumene concentrate processing (~260ktpa spod conc.) operation. Further studies are planned to consider the viability of an on-site, 25ktpa converter plant. We see the potential for James Bay to be a valuable asset, with the possibility

for added value from Li2CO3 production. Initial feasibility studies are expected to be completed in Q4'17.

Valuation

We have updated our model for the MarQ, including updated forward curve AUDUSD assumptions (LT up 5% to 0.75), and revisions to our modelled tantalum sales at Mt Cattlin. Net of these changes, our target price (NPV10%) is lowered by ~7% to A$0.70/ share (rounded).