And, here we are again. Therapy never takes just oneappointment.
Galaxy has smashed through $2.20 (downwards) resting at$2.09.
If I was in the IB or PE space, I’d be focussing very muchright now on break-up valuations in the resources sector. And which resourcessector has the most stupendous secular growth ahead of it? We all know the answerto that.Public to private transactions hinge on the ability to takeadvantage of mispricing in the listed market and reallocate such assets intothe private market where behind closed doors they can be managed far moreefficiently, with true long term timeframes in mind. The bleating of lambs inthe last couple of days about a “quarterly” update, for a resources companythat has a strong 40+ years ahead of it (with SDV), is just one example of whysome assets are better handled in private.
Let’s be clear. Don’t let these disappointing quarterlyupdates scare you. Welcome them, because the listed market over-reacts. You canuse these events (in all sectors) to add to the companies you want to own “forever”.In respect to Galaxy, I see nothing alarming here. This is ashort term blip as Mt Cattlin moves to a higher grade pit from a lower gradepit. This is not a big deal, because, Mt Cattlin is NOT RELEVANT. It’s good forcashflow over the next decade and it’s good to contribute to the ongoingdevelopments of GXY’s other projects. In the scheme of things, in the longerterm for GXY, this recent quarterly update is NOT IMPORTANT.
So once again I’m pushed to retest my principles and askmyself….should I add more GXY here?I can’t value cash-flows at this time. But the great thingabout resources companies is they are the guardians of tangible assets, hardassets, assets that can GROW and assets that can be SOLD.
Let’s take a cursory glance at GXY as a break-up valuation.
The Wodgina mine sale by MIN (50%) is a perfect example of amaterial relevant transaction. Now, I’m not going to be silly and justtranslate the value of Wodgina’s resources to GXY’s total resources. The marketis obviously not pricing the public securities that own tangible resources assets, like the private market is pricing the actual assets. That being said, it’s worth noting that ifyou did value Wodgina per tonne over GXY’s resources and take into its account, I get around $7.30 per share.
So let’s be more realistic and ruthless and break this companyapart:1) Mt Cattlin. It’s a good mine, needs to prove itselfa bit further. Anticipate 11 years of producing time ahead of it although onecould anticipate this growing to 15 years plus as it expands. Let’s be ruthlessand value this mine at 50% of the Wodgina valuation (also acknowledging that MtCattlin is essentially developed whilst Wodgina is undeveloped). That’s $120min discounted value sitting here.
2) James Bay. This resource shows very significantpromise. Its more than double the size of Mt Cattlin. Albeit, it’s yet to beapproved and Canada is for sure more difficult to gain approvals than WA. Let’sbe absolutely ruthless and value this at 10% of Wodgina. That’s $65m sittinghere.
3) SDV. Of the 15 most recognised lithium brinedeposits in the world, this one has the 3rd highest lithiumconcentration. Its feasibility analysis shows it being in the lowest quartileof production costs globally. It will have a 40 year life and its current definedresource has very material potential to grow even further. It won’t have thesame issues Orocobre is having with its high grade and concentration. If weconvert the Wodgina transaction to its LCE equivalent, and SMASH the valuationto 1/3 of the price. SDV is worth AUD $700m. Keep in mind that the feasibilityindicated an NPV post tax in AUD of $2.1 billion (funnily enough thistranslates in LCE terms to the exact same valuation as the physical transactionthat occurred for 50% of Wodgina)
4) GXY has $40m odd cash plus US $272m (US$280mless $US$8m withholding taxes) shortly arriving at an AUD cash position of $433(once the POSCO transaction settles soon).
Break Up Valuation: Mt Cattlin $125m plus James Bay $65mplus SDV $700m plus cash of $433m equals $1.32 billion. This company has NODEBT so no need to adjust for debt to arrive at an Enterprise Value.
This equates to 57% above the current price or $3.28.
So the company could be broken into its 4 compartments and still be worth north of $3. And..it's trading just above $2.
Heaven forbid we see more electric cars, buses and trucks onthe road on a monthly basis from 2020 for the next 50 years. It could actuallybe worth something? It’s worth nothing now…..
I’m buying more shortly once this trend settles down a bit.
All IMO and DYOR and DONT LET ANY STOCK RISE ABOVE 3% of YOUR NET WEALTH
