GXY 1.22% $1.62 galaxy resources limited

UBS Rating Buy (A$2.32ps)

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    UBS Research - 18/04/2019 at 8:35 PM

    Galaxy Resources "Is a Sal de Vida sell down still apossibility?" (Buy)

    Sales down 62% q/q given differences in agreed delivery schedules

    GXY produced 41.9kt of spodumene concentrate, 5% above UBSe of 40.0kt.In March the company achieved annualised run rates over 200kt. 2019 productionguidance is for 180-210kt (45-50kt in Q2 19) and we look for 198kt. Despitethis lift in production, sales were down 62% q/q at just 15.2kt given timingdifferences between production and agreed delivery schedules. Strong shipmentsin Q4 18 saw customers build inventory and weighting required shipment volumesto H2 19. GXY has indicated it does not intend to maintain large inventorylevels. Cash costs of US$452/t were 14% below our forecast for US$528/t anddown 16% q/q supported by higher volumes. Recoveries have begun to show someimprovements lifting from 45% to 51% in the MQ with completion of the Yield OptimisationProject commissioning. This project should see improvements in run rates andlift final product grades going forward.

    Formal Sal de Vida sell down process ended, still could see a deal onthe table

    During the quarter the total US$272m consideration payable by POSCO wasreleased from the escrow account and transferred to GXY. We have been expectinga further sell down at Sal de Vida for some time, but today GXY said it isformally closing the Sal de Vida process. Negotiations remain ongoing with managementnoting it may have to be more flexible in terms of price given marketconditions. We would not expect to see a deal as attractive as the POSCO selldown. GXY's strong cash position (closing cash balance of US$285m) shouldsupport the development of Sal de Vida, in our view.

    We look for an average 2019 realised price ~30% lower than 2018

    GXY has not provided a realised price; however, we estimate US$630/tpricing for the quarter, likely impacted by lower than anticipated grades(5.6%, -4% q/q). Market softness continues and we forecast a US$653/t averageprice over 2019, with 2018 prices having been over US$900/t. In March, theChinese government provided another update regarding NEV subsidies lowering thesubsidies on lower range vehicles and raising eligibility requirements whichhas impacted sentiment adversely.

    Valuation: A$2.32ps (prev. A$2.56ps) DCF @ 10% d.r.

    We lower our PT to A$2.30ps (prev. A$2.50ps), set in line with NPV. Ourvaluation now incorporates a 60% probability of Sal de Vida going ahead (prev.75%).

    Last edited by LT_Investor: 24/04/19
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