I thought I'd back-track over Anthony Tse's latest interview with Barron and break the figures down a little for the folks so that we can see where we are at with the projected profits of the next couple of years - and how they match up with the development cost of the Sal de Vida and James Bay assets.
Rather than Strachan or Canaccord reports I’m basing all my figures on what Anthony Tse has said very recently.
He should know what he is talking about by now.
This is a very long and dry accounting post, so my apologies for that.
Some might find it helpful though so they can use some of these figures to do their own research.
If I've messed something up please feel free to correct me.
Mt Cattlin Info
Mt Cattlin has a capacity of around 200kt that can be achieved 2018 (150kt for 2017).
It was operating at its old name-plate of 137kt when it was moth-balled.
It is running at 80kt now moving quickly to its old name-plate and then upgrading to 150kt.
Commisioning phase of Mt Cattlin was 2010 where it operated at 50% capacity. There had been some delays to the build as well caused by more credit-raising to get from DFS’ed $68m estimate to final mine cost of $79m.
This sort of slow ramp up should be considered in pricing all other prospective spodumene mines.
Mt Cattlin’s ramp up now is faster because it was already operational when it was closed.
There is 400kt of pre-mined material which means the coarse circuit starts in June.
What are the production costs?
$260/t is the figure that Anthony Tse gave as recently as 8th April http://www.scmp.com/business/compan...resources-reopens-lithium-mine-chinese-market
This is a lot higher than the old quoted $47/t. Its not clear what is covered by this but its large enough to assume its all-in, in AUD and covers transport to ship. This is probably the most accurate base rate production figure available right now.
But how do we work out what he is talking about here?
We know Anthony is not fond of “accretion" ( yeah it sounds yuk ) - but what that means is that he is unwilling to project any future price improvements on his estimates.
So what figures is he talking about here - what year and what production figures?
The year he is referring to is next year - 2017.
A full year of at least 150kt production and priced at the same price as the first shipment $600 USD/t.
He is at pains to suggest that the subsequent shipments will be higher but he is being absolutely conservative and the figures bear out what he says.
$600 USD = $830 AUD
$830 AUD- $260 AUD (production costs) = $570 AUD profit per ton
$570 X 150(kt) = $85.5m
$85.5m/2 (GXY’s share) = $42.75m AUD
Remember that when Anthony Tse gave the interview the AUD was a couple of points higher and would have come to pretty much exactly $40m at the time.
That $42.75m is Galaxy’s share after costs and a base rate of profit that does not assume any further value to the already sign-posted price increase of the next shipment.
In 2018 Mt Cattlin moves to 200kt - which scales up the profit to $57m AUD/year for GXY.
On top of this you can add that Anthony Tse has stated that he is chasing a price increase of around 20-30% higher for the next shipment.
Meaning that 2017s profit is probably looking more like $50m+ AUD and 2018 around $70m+ AUD.
It could be even better - with a price increase to $750 USD/t for next year or higher.
(as a side note Canaccord released bullish estimates of an eventual rise to $870 USD/t for spodumene by 2025 - thats $1200 AUD)
Add tantalum and the GMM equity payments and Galaxy will have some major money put aside to fund the SDV build.
Its hard to exactly establish how much money is earned this year other as the second shipment may or may not be made this year but we do know that there is 180kt of orders in the pipeline and that (at $260/t production and after halving with GMM that this would equate to a profit of $48.6m AUD + whatever value is added by a price increase for the second 120kt shipment).
We have been previously advised that the second shipment will also be 50% paid for in advance so GXY (alone) is due to get at least $36m USD this calendar year ($18m for first shipment total and $18m for half of the second shipment - yes thats after halving with GMM and pretty much bang on at least $50m AUD or approx $35m AUD this calendar year after setting aside production costs).
SDV
Anthony Tse projects $215m/year profit figure from SDV.
He also mentions a 20-30% equity arrangement to fund the project.
The $215m figure is harder to work out how he arrived at it - I admit haven’t really got a clean method yet.
You would assume that he is using the referenced mentioned cost of $13k US/t for carbonate
Same articles he says "Right now converters sell lithium carbonate at about USD13,000 a ton"
However, he could be using the older $12,800USD/t from the Investor Presentation that was issued at that time http://www.asx.com.au/asxpdf/20160321/pdf/435z8p3nybmjyk.pdf (pg15).
He would have been using this figures a lot as they’d have been in his power-point presentation for the funds.
So, perhaps either -
17,500t (70% of 25kt) x $12,800 = $224m (perhaps something else in the equation - production costs, interest etc)
or
20,000t (80% of 25kt) x $13,000 = $260m - $44m (20k x $2.2k/t production costs) = $216m USD
Not entirely sure what the precise number is arrived at - if someone can suggest a better calculation?
Regardless of precisely how it was arrived at $215m USD is $297.4m AUD.
Current lithium carbonate prices are now at least 50% higher at $20k USD/t ($30k AUD).
Anthony Tse refers to these prices in the same interview as "the new normal".
Still - he is clearly conservatively using the much lower figures to estimate profit.
btw: Adding capacity to SDV has been priced at $13k a ton.
Production costs are given as $2200/t - or $3050 AUD/t.
We’ll have to see what the DFS brings with more certain numbers but a Stage 3 plant at 80kt a few years down the track selling at $20k USD/t could potentially earn $1.6b USD/year (prior to equity share and production costs).
Rough figures yes - but you get a sense of what a monster this can become after reinvesting in capacity growth.
SDV was slated to cost $369m USD in the April 2013 DFS.
Now that the peso has devalued by approx 20-30% from the levels it was at when SDV was last DFS’ed.
SDV now may cost around $360m AUD to build. A sell off of 30% equity would raise $108m AUD.
Anthony Tse is suggesting a 20-30% equity sale because Galaxy may come within decent stretching distance of the approx $250m AUD bill in profits from here to end of 2018 when SDV opens. The other option is opening in stages from test-plant ramping up to 25kt plant which could be accomplished without equity or debt.
Any shortfall will be funded by a bank loan and paid out of profits over time, as it suits.
Presumably there are enough losses hanging around already and with all current profits reinvested in the new assets then there wouldn’t be much or any substantial tax to pay until they finished asset expansion. I have not included any profit for potash at this point. Presumably it ends up paying for expenses.
James Bay
Mt Cattlin cost $79m in 2010 for a 137kt plant.
According to PLS a 350kt mine now costs $184m. (bargain!)
If GMM does not partner with GXY on SDV then GMM are free to put their own same-sized profits towards this plant.
GMM could easily fully fund a build of a “copy-and-paste” job on a 137kt plant from their own profits - effective loaning GXY the cash whilst they are stretching towards SDV, or partner with GXY to fund the larger one via buying more equity and borrowing the short-fall for the 350kt plant.
Either option would work and JB could begin operation as early as 2018 if DFS is followed quickly by build.
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These are rough numbers of course, but they tell a pretty good story here.
They match up with the scale and percentages in Anthony Tse’s plans.
There may be approx $150m+ AUD profits for each partner by end of 2018 - add GMM equity payments (for GXY) and tantalum credits.
There is even the possibility of James Bay generating income in calendar year 2018. And SDV opening in Q4 2018.
Certainly SDV can be reached with the help of bank finance and there is the possibility of GMM getting James Bay going under its own financial steam (at first).
The next 2.5 years should set up GXY/GMM with 3 amazing assets all generating profits accelerated whilst demand is still ramping up.
If JB is a copy of Mt Cattlin then we are looking at 2 x 200kt plants and a 25kt brine project beginning to take GXY’s earnings to north of $400m AUD a year.
Roughly - $70m (GXY’s half of 200kt Mt Cattlin) + $70m (GXY’s half of 200kt JB) + $300m (GXY’s base rate share of 25kt SDV at conservative $13k/t) = $440m AUD/year.
If SDV is able to sell at higher prices than the measly $13k/t then the base-line annual profit figures move much much higher towards $600m/year. Same applies if James Bay is to become a 350kt instead of a 200kt plant.
And then beyond as SDV ramps up ...
Of course, DYOR
GXY Price at posting:
40.8¢ Sentiment: Buy Disclosure: Held
