I have been refreshing my valuation model in line with my...

I have been refreshing my valuation model in line with my expectations for Phase 2. In doing this I looked at my Phase 1 DFS model and noticed that the current share price is, coincidentally, really valuing Galan based on Phase 1 alone:

Which is disappointing to say the least.

However, moving on to the Phase 2 DFS which sounds like it's still on track for release around the end of September I have the following estimates:


As you can see there is a big uplift on the NPV based valuation if the numbers are in-line with my expectations (these numbers are all post-tax in AUD). The DFS for Phase 2 should be more or less 4 times the numbers of Phase 1. To come up with these numbers I have actually re-calculated NPV and FCF based on the pricing and costs represented in the Phase 1 DFS and allowing for some relatively minor economies of scale. Once the offtake is confirmed (label "DFS/BFS+OT" above), before the end of the year, there should be additional NPV value attributed which paves the way for raising the additional funds required for phase 2 close to or above $1.50. In my model above, to be conservative, I have included all the Phase 1 Capex some of which will be sunk cost (maybe $50m) by the time we raise for Phase 2 (so the actual capex required to complete Phase 1/2 raise should be smaller than I have represented above).

I have included calculations for 30% debt and 70% equity financing (i.e. the 30% debt numbers - the middle 4 rows) which I feel is the most likely at this point (basically assumes a ~$200m offtake repayment). If the raise occurred at $1.50 (remember this is after DFS2 has been released and offtakes announced) then this gives a valuation of around $2 at the point of finance (labelled 3 above), $2.60 once in construction for Phase 2 (labelled 4) and $4.42 once in production and near to operating at name plate (labelled 5). The "production" stage valuation is where I stop using the NPV and start using the Free Cash Flow (FCF) and applying a PE multiple. In this case I have highlighted $4.42 (label 5) which sits in the "Mid" level PE estimate of 10, but you could apply whatever PE you like to the post tax FCF figure. I think a PE of 10 would not be unreasonable given the long term forecasts with respect to the lithium industry and the growth potential of moving towards 60ktpa. I have just highlighted a scenario and described it here so you can understand how to read the table.

For those that think there is no chance of a prepayment and/or are worried about the dilutive effectives of a 100% equity raise, you can look at the 1st 4 rows where I have highlighted a $1.50 equity raise (again you can assume a lower raise price if you want to). You can see here that the valuation at the time of production would be $3.73 (based on a PE of 10) - so a 70c differential to the 30% debt/equity scenario, which to me is certainly not a disaster in the scheme of things.

I have also included a 50% debt/equity scenario which some people might say is impossible but could represent a situation where we give away 50% of the project in return for 100% of the capex (less the sunk costs mentioned above). This doesn't need to be 100% of the capex coming from the JV partner. It might be that 75% of the capex comes from the JV partner and the remaining 25% comes from an offtake repayment (potentially from that same partner). Obviously, in terms of dilution this yields the best result and gives a valuation of closer to $5 once in production (depending on the implied value that the JV partner signs up at - which might well be at a premium to the market valuation - acknowledging that you could never get 50% of Galan at the current market price).

So I guess my point here is that dilution is absolutely necessary and that the amount of dilution impacts the investment returns, however when you run the numbers it's not as bad as you think. That is, while it's great that you currently own 100% of a developer, it's worth a hell of a lot more to hold 40% of a producer, for example. The main thing is that you have a pathway to production because most explorers right now (one of which hit a $400m diluted EV last week without any drilling results) won't find an economic resource that allows them to go to production.

For completeness I have included my NPV valuation table below so you can see what proportion of the post tax NPV I am attributing to the value of the company at each stage. You may choose to apply different proportion of NPV to each stage:

As an example, this table is saying that once the DFS is released (without offtakes) that the company could be valued at 15% of NPV for a lower valuation estimate, 30% of the NPV for an upper valuation estimate and 22.5% as a mid point between these 2 valuations. I find these numbers work pretty well across most sectors but are pretty conservative (generally) in the lithium space.

As always, this is just my views on things and not financial advice.