From Citi's latest piece on GXY... DSO Concerns Overdone;...

From Citi's latest piece on GXY...


DSO Concerns Overdone; Upgrade to Buy

Galaxy’s share price is down ~30% MTD largely driven by concerns DSO supply will flood the market. We see this as more opportunistic supply than a structural threat to the lithium market - Paddling Hard to Catch Electric Wave of Demand. We believe these concerns provide an attractive entry point to get exposure to pure lithium play given GXY's current cash flow profile (Mt Cattlin) and solid project pipeline (James Bay/Sal de Vida). We upgrade Galaxy Resources to Buy/High Risk at a slightly reduced target price of A$2.70/share (previously A$2.75/share).

Can DSO Be Disruptive?
The DSO ore shipment from Wodgina can add as much as 20-40ktpa LCE to the global lithium market (based on 50% recovery). However, we believe these volumes are not sustainable at our 2018 lithium carbonate price forecast of $11,250/t and there is also a lack of infrastructure to process this ore in China to have a real impact on the downstream supply. On our assumptions (Figure 2) the break-even for DSO at a US$80/t FOB selling price is >U$11k/t LCE, increasing to >US$12.5k/t at a US$100/t FOB ore price.

2017 Volumes
GXY has guided for 160kt spodumene volumes for 2017. So far the company has shipped 54kt and, at the current rate, we expect ~90kt of shipments for rest of the year - take total to 145kt or 15kt lower than guidance and our prior estimate. We believe this is more of a timing issue as the plant is now operating at an average 440tpd throughput (>160ktpa annualized). Grade >5.7%, mica content (<2%) and recoveries >50% also are running in line with our expectations.

· Next Catalysts
We believe impending resources update at James Bay (expected next month), 2018 spodumene volume contracts (expected in 3Q) and Sal de Vida project financing/offtake agreement (expected by the end of this year) are some key catalysts to watch for the stock this year. We see potential upside to 2018 contract pricing for GXY given spot lithium carbonate prices are ~11% higher since mid-Dec 2016 (when 2017 pricing was concluded by GXY).