GXY 0.00% $5.28 galaxy resources limited

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    Galaxy wants to complement its hard rock lithium operations in Australia with a brines operation in South America. Marcelo Perez del Carpio
    by Peter Ker
    Lithium exporter Galaxy Resources says it does not fear the supply surge that will come within weeks from two new Australian lithium mines, and says it received higher prices for its product over the past six months despite falls in some high-profile price indexes over the same period.
    Lithium stocks like Galaxy, which exports a lithium-rich spodumene concentrate from Australia's south coast, have been battered over the past eight months amid concerns about large amounts of new supply hitting the market and in response to a 30 per cent fall in the Chinese spot price for lithium carbonate with 99.5 per cent purity.
    The theme was revived this week when one of the world's biggest lithium producers, Chile's SQM, predicted that its received prices in the six months to December 31 would fall by a maximum of 10 per cent compared to the first half because of new supply from Australian miners such as Pilbara Minerals and Altura Mining, who are scheduled to begin exports within weeks.
    But Galaxy managing director Anthony Tse said he was "not overly concerned" about more Australian spodumene concentrate entering the market.

    "When you look at Pilbara and Altura's offtake arrangements to the extent they were previously made public, our understanding is their pricing mechanism is very different from ours and their mix of customers is also very different from ours," he said.
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    Galaxy received $US940 per dry metric tonne for its product in the first half of 2018; that result was higher than the $US868 per tonne received in the three months ended December 31 and the $US783 per tonne received in the six months ended on December 31 last year.
    Mr Tse cautioned against reading too much into the recent falls in Chinese lithium carbonate spot prices, saying that contract prices were stronger than spot prices and Galaxy's contracts had no linkage to spot prices.
    He also highlighted the fact that prices for lithium hydroxide in China, and lithium carbonate outside of China had not suffered falls of the same magnitude.
    Expecting strong pricing

    Mr Tse was evasive when asked whether Galaxy's received price would fall in the six months to December 31, but indicated he believed pricing would remain strong.
    "From a second half of the year outlook, our view is that we will start to see a recovery in procurement of raw materials given the second half of the year typically far outperforms the first half of the year in terms of raw material procurement due to [electric vehicle] production and sales ramping up in the second half of the year," he said.
    "When you look at the fundamentals, you have a bit of dislocate between what I call the actual real demand and supply situation versus what the sentiment is at the moment, and my view is that the sentiment has been affected by perceived mass volumes of supply coming online.
    "Are we in a worse-off situation [compared to this time last year] from a demand and supply perspective? I would say no. Is the sentiment at this point of this year as good as what it was last year? The answer to that is probably no as well."

    The comments come two days after fellow ASX-listed lithium producer Orocobre said it was confident of avoiding the price falls predicted by SQM and that it expected received prices to be on par with those in the first half of 2018.
    Spodumene concentrate must be processed into either lithium carbonate or lithium hydroxide before being used in lithium-ion batteries, and many pundits have argued that a shortage of conversion facilities will ensure the market for carbonate and hydroxide remains tight despite increased production of spodumene concentrate.
    Mr Tse said he did not expect a conversion shortage in China to last long.
    "We still actually see more planned and in-construction lithium conversion capacity coming online than there is actually feedstock available in the market as of today, and so from that perspective that is something that we are not overly concerned about," he said.

    Pondering shareholder returns

    Galaxy's higher received prices and higher export volumes drove an eightfold increase in revenues compared to the first half of 2017, with Galaxy reporting revenues of $US88.4 million in the first half of 2018..
    Net profit after tax totalled $US11.5 million ($15.8 million), which was below the $US16.4 million expected by some Australian analysts.
    Galaxy did not pay a dividend, but indicated it was starting to think about shareholder returns after clearing its debt and building a $US45.1 million cash pile on the back of profitable production at its Mt Cattlin mine.

    The cash balance will soon be bolstered by this week's $US280 million sale of South American tenements to POSCO, and the likely sale of a minority stake in Galaxy's flagship growth project at Sal De Vida in Argentina.
    Mr Tse said that combination of transactions should enable the company to fund the $US474 million construction of Sal De Vida and potentially reward shareholders.
    "In terms of funding for Sal De Vida we are very comfortable that the remaining balance of the capex required, that $US474 million, will be satisfied through the [stake sale] process," he said.
    "That financial position we have in the balance sheet will be very much significantly boosted by the end of the year and that is something the management and board is very actively considering in terms of what is the most appropriate capital management initiative that we should be considering in light of that significant cash situation by the end of the year," he said, when asked about the prospect of a special dividend.
    "So that is something we are actively looking at."
 
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