Continues to enjoy some of the best institutional support of any...

Continues to enjoy some of the best institutional support of any ASX Lithium stock.

https://www.fundmonitors.com/_showfile.php?FID=18659

11 Jan 2017

Paragon Australian Long Short Fund

“What Worked in 2016
We maintained exposure to our continuing themes, many of which we’ve invested in since inception, as evidenced in our monthly updates over the last 4 years. A standout for 2016 is our electric vehicles theme, with strong performers in companies benefiting from the rise in lithium demand from electric vehicles. Key stock winners included Orocobre, Galaxy, Kidman and Pilbara.

A special mention should go to our investment in Galaxy Resources given the company was one of the best performing ASX300 stocks in 2016 (similar to our picks of LNG in 2014 and Xero in 2013). We first invested in Galaxy in early 2016 at $0.16/sh and have written several times about its strong investment case. We also took advantage of its price correction in August by adding to the position, as discussed in our August 2016 monthly report.

Galaxy has been an exceptional turnaround story and has since commenced production at its Mt Cattlin project in WA, into a lithium bull market. As we anticipated, Galaxy has positively surprised on CY17 product pricing and likely to do the same in CY17 production volumes. Galaxy’s world class greenfield Sal de Vida brine-based project (still being given next to zero value by the market) is very well placed to de-risk and secure a funding solution in 2017. Despite rerating to $0.60/sh, Galaxy remains cheap, and its global peers continue to trade at >2x Galaxy’s key metrics.”

August 2016 Report

http://www.paragonfunds.com.au/pdf/Paragon-Fund-Performance-AUG2016.pdf

“Lithium holdings
The lithium market continues to be buoyant, experiencing unprecedented growth. Two of our largest holdings, Orocobre and Galaxy, were impacted adversely due to announcements of unforeseen delays in achieving full production targets. Strong Chinese spot pricing corrected ~20% off its elevated highs and bearish bulge-bracket broker research predicting material oversupply in lithium from 2017 added to the volatility.

Galaxy fell 15% in August as the company tempered guidance for its Mt Cattlin lithium production for the second half of 2016 and 2017. Orocobre was sold down 7% in August as the company also pushed out its guidance for Olaroz lithium nameplate production (17.5ktpa) by 2 months to November. We were surprised by the negative share price reactions as 1) our modelling has been based on conservatively lower production, given both companies’ assets are in ramp up, 2) we expect volume weakness to be offset by strong realised product prices, and 3) we believe that material near-term industry oversupply concerns will prove to be incorrect. Lithium demand should continue to surprise to the upside and new projects coming online on time and at design capacity is also highly unlikely.

Galaxy’s latest announced delays are a case in point.

As we have expected and written about previously, contract lithium (large volume and hence market indicative) pricing has continued to rise and converge with elevated Chinese spot pricing. We expect the lithium market to more than triple over the next decade and for pricing to remain strong. We draw parallels to the 10yr+ Iron Ore bull market until 2014 driven by China’s industrialisation where 1) the global Iron Ore seaborne market more than tripled to 1.5btpa, 2) traded from modest deficits to surpluses over the entire period and 3) resulting Fe prices rose 8x. This took select Iron Ore stocks through a sometimes volatile yet overall exceptionally long bull market run.

We continue to view the fundamentals for lithium and our key stock picks as compelling. We have used the share price weakness in August to buy more Galaxy (at $0.33/sh) given its strong risk-reward (stripping out a very conservative value for its world-class Sal De Vida brine asset implies CY17F PE of 6x and PCF of 5x – outstanding value given Galaxy’s strong growth outlook and strategic, solid-margin, low capital-intensity, long mine-life asset mix).”