Galaxy Resources Report
Galaxy Resources Report
Galaxy Resources Report
(ASX: GXY)
Equity Research and Market Intelligence
Price (A$): Target Price (A$): with battery plant: Beta: Price/Book Ratio: Debt/Equity Ratio: Listed Exchange:
1.94
1.59
4,780
1.24
4,480
0.89
4,180
May-10
Aug-10
Feb-10
Nov-10
Feb-11
Investment Arguments
High Future Demand for Lithium Carbonate: Lithium Carbonate is the basic raw
material for the production of lithium used for production of lithium batteries. China is targeting twenty percent of its energy requirement by 2020 from renewable sources
GXY
S&P/ASX 200
Site for Manufacturing Plant Finalized, Offers Potential for Higher Margins: Galaxy
has selected a site located in the Jiangsu Eco-Friendly New Materials Industrial Park to construct a manufacturing plant in China to produce lithium ion batteries for E-Bikes. This offers the potential for higher margins and a direct exposure to the high growing Ebikes market in China. When in production the Company will be worlds largest supplier of EV grade lithium
11/01/2011: Galaxy completes review of Ponton Rare Earths Project 11/08/2010: Galaxy finalises capital raising of A$91.5 million 11/04/2010: GXY applies for a dual listing of its shares on the Stock Exchange of Hong Kong (SEHK) 10/05/2010: Galaxy Resources announced that the Company has commenced lithium concentrate (spodumene) production at Mt. Cattlin 10/04/2010: The Company has agreed in principle to issue A$30 million in a convertible note to a strategic China based investor 09/07/2010: Announced that the Company has launched two high grade lithium carbonate products tailored specifically for lithium batteries to be used in production of electric vehicles 09/02/2010: GXY commenced the commissioning of its lithium carbonate facility at Mt. Cattlin Shares in Issue 192.65M Market Cap A$ 306.32 M 52 Week High: A$1.815 52 Week Low: A$0.905
Strong Lithium Assets: In the near future, the Mt Cattlin mine will be the worlds
second largest hard rock producer of lithium and through the development of its value adding lithium carbonate plant (17,000 tpa) the Company will be the largest producer of EV grade lithium carbonate in the world
Ease of Operations: Mt Cattlin is a simple, relatively risk free open-pit mine with ease
of accessibility. The processing of spodumene to lithium carbonate is a time tested and well understood process. The Company can easily upgrade the ore by simple crush and heavy media separation. Also the China plant has all required utilities on site and all key reagents are available in a nearby region. This has helped to reduce operational risks
Off-take Arrangements in Place: The Company has entered into off-take framework
arrangements for 17,000 tpa of lithium carbonate with Mitsubishi Corp and 13 major cathode producers in China
www.RBMILESTONE.com
Interest in Future Global Rare Earths Supply: Galaxy has announced positive results
from a review of the Company's 100% owned Ponton Rare Earths Project (Ponton Project), which has been held by Galaxy since 2003. The Ponton Project is located 200 km east of Kalgoorlie in the eastern Goldfields region of Western Australia, 70 km north of the Trans-Australian railway line. It comprises a single Exploration Licence Application (E28/1317) covering about 206 sq km
Proposed Hong Kong Listing to Provide Strategic Presence in Asia: Galaxy has
received its shareholders approval to all resolutions for the Companys plans to list on the Hong Kong Stock Exchange (SEHK) towards the end of Q1 2011. The Company has applied for a dual listing of its shares on The Stock Exchange of Hong Kong (SEHK). It has submitted its Form A1 listing application and is subject to SEHK approval. Morgan Stanley and BNP Paribas have been appointed as joint sponsors and joint book-runners. Additionally, the Company finalized a capital raising of A$91.5 million to several strategic investors, which will provide liquidity for investments
Company Overview
Galaxy Resources Limited (Galaxy or the Company), based in Western Australia, is engaged in the production of lithium and tantalum. The Company owns the worlds second largest hard rock spodumene mine for the extraction of lithium. The Company intends to vertically integrate in the value chain downstream by producing lithium carbonate, a basic raw material for the manufacture of lithium ion batteries. Towards this end, the Company has set up a manufacturing facility in Chinas Yangtze River International Chemical Industrial Park of the Zhangjiagang Free Trade Zone which will produce battery grade lithium. The Company has a 100% ownership of this entire value chain from the mining resource to the production facility in China. The basic business model of the Company is to mine the spodumene resource from the Mt. Cattlin mine, ship it to China for further processing into battery grade lithium carbonate and then have it sold to Chinese battery makers. The Companys vision is to be Chinas lowest cost, largest supplier of premium battery grade lithium carbonate. Galaxy has signed a Memorandum of Understanding ("MOU") with Lithium One Inc., under which Galaxy can acquire up to 70% of the James Bay lithium pegmatite project in Quebec through an earn-in and joint venture agreement ("the Definitive Agreement"). Under the terms agreed in the MOU, Galaxy will initially acquire 20% of the James Bay Project for a cash payment of C$3 million. Galaxy may earn up to 70% through the completion of a Definitive Feasibility Study ("DFS") within a 24 month period, including a committed investment of at least C$3 million in the next 12 months. Galaxy Resources Limited announced that it has received positive results from a review of the Companys 100% owned Ponton Rare Earths Project (Ponton Project), which has been held by Galaxy since 2003. The Ponton Project is located 200 km east of Kalgoorlie in the eastern Goldfields region of Western Australia, 70 km north of the Trans-Australian railway line. It comprises a single Exploration Licence Application (E28/1317) covering 206 sq km. During the review, Galaxy analysed historical rare earth element (REE) exploration and drill data completed by Herald Resources Limited in 1994. Detailed aerial and ground magnetic and radiometric surveys were completed, which outlined a strong radiometric anomaly in the east of the tenement, in addition to several magnetic anomalies. In light of interest in future global rare earths supply, Galaxy has decided to review and evaluate the potential viability of the Ponton Rare Earths Project. Corporate Structure Galaxy Resources Limited is a company limited by shares that is incorporated and domiciled in Australia. It is the ultimate parent entity. The structure of the Consolidated Entity is as follows:
Source: Company
The estimated capacity of Mt Cattlin Spodumene Mine is 137,000 tpa 6.0% Li2O Spodumene with a mining life of over 16 years. The Company has executed off-take agreements for 100% of Galaxy's 17,000 tons of lithium carbonate production and has a major off-take agreement signed with Mitsubishi Corporation (Japan).
Exhibit 2: Product Flow to the Market
Source: Company
The total project costs estimated by the Company for both the projects, Mt. Cattlin Spodumene Mine & Jiangsu lithium carbonate plant, amount to A$162.5 million. The projects are funded by equity placement to institutional investors and project finance from a syndicate of international banks. The Company has issued 31,000,000 shares to Creat Resources Holdings Limited (CRHL), a private Chinese investment firm, thereby raising A$33 million for a 19.99% stake in the Company. Apart from equity issue, the Company has secured project finance facility for US$105 million from a syndicate of banks comprising, Austrian Bank, RZB and the China Development Bank (CDB). The Company also raised A$65 million in 2009 as an equity placement and together with recent A$91.5 million raising, the total amount raised to date is A$294 million. Proposed Hong Kong Listing to Provide Strategic Presence in Asia Galaxy has applied for a dual listing of its shares on The Stock Exchange of Hong Kong (SEHK). It has submitted its Form A1 listing application and is subject to SEHK approval. Morgan Stanley and BNP Paribas have been appointed as joint sponsors and joint bookrunners to the proposed issue, while Azure Capital has been engaged as the Companys financial adviser. The listing is expected to provide greater access to capital sources, and improve liquidity. In another development, Galaxy recently announced that it has finalized a capital raising of A$91.5 million to several strategic investors, including key current shareholders. The capital
Galaxy Resources Limited raising consists of A$61.5 million in unlisted convertible bonds and A$30 million in equity placement. The terms include a conversion price of $1.56 on the convertible bonds, which represent a premium of 33.8% over the 20 day VWAP of Galaxy shares prior to the pricing date of 28 September 2010, and an equity raising market price of $1.39, equivalent to the 5 day VWAP of Galaxy shares prior to pricing date of October 21, 2010.
Resources Overview
Mt. Cattlin Project
The Mt Cattlin Spodumene mine is located approximately 2 km north of the town of Ravensthorpe in Western Australia. It is the second largest hard rock spodumene mine in the world. The Mt Cattlin hard rock spodumene resource is mineable by open cut at a low waste to ore ratio. It is a risk free open-pit mining resource and processing of 15 million tons of ore over a 16 year period would be carried out. The flat ore body allows a constant strip ratio once the ore is uncovered. Tests indicate the ore is readily upgradeable to a premium grade concentrate. The company owns this mineral resource. The company also holds a series of tenements surrounding and including the mining lease M74/12, which contains most of the spodumene (LiAlSi2O6) resource identified to date. The Project involves the mining and processing of pegmatite ore to produce a spodumene concentrate and a tantalum by-product. Ore processing will be at a rate of one million tpa at an average grade of 1.1% Li2O and will produce approximately 137,000 tpa of spodumene concentrate at 6.0% Li2O and 56,000 lbs pa of contained tantalum (Ta2O5). Spodumene concentrate ore used in production of lithium carbonate will be transported by road train to Port of Esperance to be shipped out to Zhangjiagang Port in China to be taken to Jiangsu lithium carbonate plant (Zhangjiagang, China). Mt Cattlin Key Milestones
Exhibit 3: Milestones
Nov 2009 Dec 2009 Apr 2010 Sep 2010 Oct 2010 Q1 2011 Ground Breaking Construction Commences Pre-strip Commissioning Production First Shipment
Source: Company
Source: Company
Mt. Cattlin Project Updates The Company, on October 5 2010, has commenced lithium concentrate (spodumene) production at Mt Cattlin. Following the successful commissioning of the crushing circuit and heavy media plant, the production start-up is on schedule. Over the coming weeks spodumene throughput will be progressively ramped up until the design capacity is reached on a continuous basis, ahead of its first shipment in Q1 2011.
th
Galaxy Resources Limited vehicle market. This modification will allow the Company to utilize the full production capacity of 17,000 tons per annum of EV Grade lithium carbonate. In addition, the plant will also have the capacity to produce a limited amount of the higher purity EV Plus Grade.
Exhibit 6: Jiangsu Lithium Carbonate Plant Site (Zhangjiagang, China)
Source: Company
Source: Company
Galaxy Resources Limited The Company estimates that China produced 30 million E-Bikes in 2009 and the market is growing at 5-7% per annum. The Company has entered into a non-binding Memorandum of Understanding with a Korean consortium, KUBT, to supply the turn-key equipment for the project. KUBT is a group of equipment suppliers that have formed a consortium to provide plant design and equipment supply services and has already supplied equipment to several large lithium ion battery producers, such as LG Chem, Samsung and SK Energy. The current analysis of project feasibility is being handled by an experienced team of lithium battery operation and technology experts, headed by Mr Walter Yi, Managing Director (Battery Division) who previously served as a General Manager of A123 Systems lithium battery plant in China.
Exhibit 9: Galaxy Proposed Battery Pack and E-bikes
Source: Company
Source: Company
During the review, Galaxy analyzed historical rare earth element (REE) exploration and drill data completed by Herald Resources Limited in 1994. Detailed aerial and ground magnetic and radiometric surveys were completed, which outlined a strong radiometric anomaly in the east of the tenement, in addition to several magnetic anomalies. Previous surface sampling over the radiometric anomaly also produced strongly anomalous REE results. A further historical aircore drilling programme, completed to blade refusal, returned significant intersections of REE mineralisation. The best historical drill results show intersections including 16m @ 14.48% rare earth oxides (REO), 28m @ 10.50% REO (including 6m @ 20.57% REO) and 26m @ 6.99% REO from surface (including 8m @ 13.12% REO). As a comparison, Lynas Corporation Mt Welds Central Lanthanide deposit has an average resource grade of 10.7% REO + Y.
Source: Company
Galaxys review of the Ponton Project shows the grades and distribution of the various rare earth elements are comparable to those of the high grade Mt Weld deposit (Western Australia) being developed by Lynas Corporation and the Nolans Bore deposit (Northern Territory) being developed by Arafura Resources Limited. However, Ponton has a higher percentage of the element neodymium, which is projected to be in tight supply. Upon tenement grant, Galaxy plans to commence an exploration program to update and confirm previous drilling results. Follow up targets include the northwest magnetic anomaly and further exploration work to define further REE and possible uranium targets. In light of interest in future global rare earths supply, Galaxy has decided to review and evaluate the potential viability of the Ponton Rare Earths Project.
Industry Overview
Lithium is the lightest and least dense metal on the earth. It is a highly reactive element and has the capacity to store more charge as compared to other metals, making it most suitable for the batteries of portable consumer electronics such as mobile phones and laptop computers. It also has application in other industries such as ceramics; glass; aluminum; pharmaceuticals; and lubricant and refrigerating agents. Apart from this, demand of lithium has arrived from some other sectors as well, such as the nuclear and photoelectric industries. Increasing demand from these sectors would drive the growth of lithium demand in future, mainly due to increasing demand of lithium-ion batteries from auto sector for Electronic and Hybrid Electric Vehicles. Puna Plateau of Argentina and Chile accounts for over 80% of world lithium production and has the largest concentration of economic salars in the world. Salar is the Spanish term for salt flats, which are generally the remnants of historic bodies of water, such as lakes or rivers, or of temporary and seasonal lakebeds.
Exhibit 12: Sources and End-uses of Lithium
Source: Roskill
According to Roskill estimates, in 2008, the total demand for lithium was approximately 21,280 tons (or 113,200 tons of LCE), while due to the impact of the global financial crisis global demand for lithium fell to around 102,500 tons of LCE in 2009. At the World Lithium Supply and Markets 2009 conference in Santiago, Chile, the worlds top three lithium producers, SQM, Chemetall, and FMC Lithium, along with research groups TRU Group and Roskill, presented an outlook for lithium. According to their forecast, world lithium demand is expected to grow three-fold in just over ten years. Growth is driven by secondary (rechargeable) batteries and Electric Vehicle (EV) batteries. The demand for Litnium Carbonate Equivalent (LCE) is expected to rise to around 250,000 to 300,000 tpa in 2020 driven by rechargeable batteries and EV batteries, according to the outlook.
Lithium Demand
Lithium consumption growth in future would be driven by increasing demand of rechargeable batteries for portable electronic gadgets, and electric and hybrid vehicles. In Kyoto Protocol, nations around the world have pledged to reduce green-house gases and carbon emission. This has increased the demand of the clean and green vehicles worldwide. Hence green-car revolution could make lithium one of the planet's most strategic commodities as EVs and HEVs batteries requires a hundred times as much lithium carbonate as its laptop equivalent.
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Batteries 23%
Other 15%
Source: Roskill
The largest uses of lithium, according to the Roskill estimates, are in the manufacture of ceramics and glass, which accounted for 31% of total demand in 2009, and the manufacture of lithium-ion batteries, which accounted for 23%. Other significant end-uses include the manufacture of greases, and in aluminum smelting, air treatment and continuous casting.
Exhibit 14: Growth in Other Areas Before EVs
Electric Vehicles Energy Storage Starter Batteries US$2.5b 2015 Porsche 2-3% Adoption Pow er Tools
Li Battery Units
E-Bikes
Electronics
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Source: Company
2020
11
4 3 2 1 0
100 75 50 25 0
2008
2009
2010f
2011f
2012f
2013f
2014f
2015f
2016f
2017f
2018f
2019f
EV Sales (Li-ion) (LHS) PHEV Sales (Li-ion) (LHS) HEV Sales (Li-ion) (LHS) HEV Sales (NiMH) (LHS) Lithium Demand from Vehicles (10% Penetration Scenario) (RHS) Lithium Demand from Vehicles (5% Penetration Scenario) (RHS)
Source: Chemetall Company Presentation Note: Vehicle sales data assumes 5% electric vehicle penetration by 2020 (i.e. 5% of total vehicles will have some form of battery power assist) 2kg LCE in HEV, 15kg LCE in PHEV and 22kg LCE in EV
China 28%
Europe 28%
Other 2%
Source: Roskill
In March 2009, US President Barack Obama announced $2.4 billion fund for Department of Energy (DOE) to support next generation electric vehicles. Advanced batteries, capable of meeting standards for durability, performance, and weight, are a key technology for plug-in hybrid electric vehicles and other electric vehicles. DOE plans to provide assistance to construct or upgrade battery manufacturing, component, and recycling plants for lithium-ion and other advanced batteries, as well as for production factories for electric drive vehicle power electronics.
Lithium Supply
Sources for Lithium Extraction
Lithium Brines: Salt lakes with a concentration of minimum 600 mg of lithium per litre
are a cost effective source of lithium, but too much magnesium can also cause problems. A ratio of more than 9:1 magnesium to lithium is considered uneconomical. The
2020f
125
Galaxy Resources Limited methodology of extraction is to pump salt water containing lithium from the ground into an evaporation pond. Filling the pond takes about a year, then the evaporation process can take anywhere from about eight months to three years.
Spodomene (Hard Rock Lithium Source): In case of spodumene deposits, the rock
must be mined and heated up to 1,100 degrees celsius and then pulverized before the spodumene crystals are processed with acid to produce lithium. Once a mine is in production, getting lithium from hard rock is far quicker than producing from brine. But costs are higher because it involves traditional mining and an energy intensive separation process.
Hectorite Clay: A newer source of lithium is clay deposits - which sits between brines
and hard rock in terms of cost-effectiveness. The mining costs are cheaper with clay, as it is relatively easy to extract. But the clay must be leached or roasted to extract the lithium, a chemically intensive process. There is currently no lithium produced from hectorite, but explorers say processing clay in Nevada could rival Chile's brines for costeffectiveness.
Exhibit 17: World Mine Production and Reserves: in MT
Country United States Bolivia People's Republic of China Russia (recoverable) South Africa Tajikistan Thailand Other countries World Total (rounded) Source: www.Li3Energy.com 2008 W 3,500 180,000 3,500 2,800 2,000 5,000 197,000 2009[e] 4,500 170,000 3,000 3,000 2,000 4,000 187,000 Reserves 310,000 790,000 350,000 44,000 50,000 420,000 150,000 2,100,000 W- With-held data
Source: Roskill
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2010f
2011f
2012f
2013f
2014f
2015f
2016f
2017f
2018f
2019f
New capacity required Chinese mineral conversion capacity (effective) Chinese brine capacity (effective) Existing Americas brine capacity Compound consumption (5% EV penetration rate by 2020)
Source: Chemetall Company Presentation
2020f
14
2008
2009
Source: Company
REEs have a wide range of uses in advanced technologies, including superconductors, magnets and catalysts. Their application in environmentally-friendly technologies including low-emission electric and hybrid vehicles has seen a rapid growth in demand. The diverse nuclear; metallurgical; chemical; catalytic; electrical; magnetic; and optical properties of REEs have led to an ever increasing variety of applications. They are particularly vital in new green technologies such as super magnets, energy efficient lighting and rechargeable batteries.
Exhibit 21: End-Use Application of REE Energy Production Energy Reduction Energy Efficiency Lifestyle
Petroleum Refining La
UV Filters in Glass Ce
Rechargeable Batteries La
Components to Hardware Nd
Energy-Efficient Lighting Pr Eu
Medical Service Nd Gd
Dy (Dysprosium) Pr (Praseodymium)
Tb (Terbium) Eu (Europium)
Medical Service Ce
China tops the list of countries having the largest proportion of REE reserves at about 27 million tons (equivalent to around 30% of the worlds reserves) while the USA accounts for another 13 million and Australia 5 million and India 2.3 million tons, respectively.
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India, 0.84% Brazil, 0.05% Australia, 3.76% Other countries, 14.91% United States, 9.08%
China, 57.72%
CIS, 13.62%
Source: Company
China, which supplies over 90% of the worlds REE market, has in recent years reduced REE export quotas. In late 2010, the Chinese Ministry of Commerce announced a 35% reduction in the export quota for the first half of 2011, compared to the corresponding period in 2010. However, about 42% of worldwide reserves of rare earth ores still lie outside China. China has been exporting less in the recent years to meet domestic demand. Sometime in 2011 to 2012, Chinese domestic demand is expected to surpass Chinese domestic production.
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Weaknesses
Dependence on a Single Project: Lithium supplies are currently concentrated in a single project; any significant expansion will take time. Also, other properties are at various stages of exploration, hence there is no assurance about commercial quantities of spodumene or of any other minerals from such properties. Exploration and Development are High Risk Undertakings: Other than Mt Cattlin, the Companys prospects are at varying stages of exploration and there is no guarantee of commercial success.
Opportunities
EV- Based Demand: Demand for lithium batteries is growing exponentially. Ongoing advances in lithium battery technology confirm that, at least for the coming decade, lithium will offer the core material in facilitating electronic car advancement. With Galaxys focus on the lithium battery segment and a proper plan in place to become one of the leading producers of lithium, the Companys future looks bright. Battery-Grade Lithium Carbonate: The area of business for Galaxy, battery-grade lithium carbonate, has considerable premium over the chemical grade. Also, due to anticipated demand for electric vehicles, the price of battery grade lithium is assumed to increase substantially. Galaxy has already made certain modifications at its Jiangsu plant to improve the product quality. This will provide an opportunity to chase even higher prices by producing a product with very low impurities. Growing REE Market: REEs are fast emerging as strategically important commodities to the global manufacturing base and is a crucial base for clean and green energy supplies for the future. The market analysis indicates that demand for rare earths is set to grow strongly over the next 20 years giving significant opportunities to the Company. Market demand for rare earths presents opportunities in developing the Companys long held Ponton Rare Earth Project.
Threats
Exploration Risk: Exploration and mining involve a high degree of risk. Few exploration properties end up going into production. There can be no assurance that the expenses incurred by the Company to explore its properties will result in the discovery of a commercial quantity of minerals. Most exploration projects do not result in the discovery of commercially viable mineral deposits. Environmental Regulations: Mining has adverse environmental impacts with substantial potential to harm human health. Environmental regulations and standards are subject to constant revision and could be substantially tightened. This could entail unforeseeable additional costs, capital expenditures, restrictions or delays in the Companys activities and its ability to develop its properties economically.
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Competitive Analysis
Location of the Plant: The Jiangsu Plant is located in the Yangtze River International Chemical Industrial Park of the Zhangjiagang Free Trade Zone, and can exploit economies of location being in proximity to the end user of the lithium carbonate battery makers for the electric vehicles and the cement and detergent manufacturers where it can sell it byproduct. On one hand, it can procure the raw materials required for its process at lower costs and, on the other, it also gets subsidies and incentives. This makes the Company the lowest cost producer of lithium carbonate in China. Brines Vis--Vis Hard Rock: The top three producers of lithium carbonate from brine have less than twenty percent market share in China and are too concentrated in South America. China is used to hard rock based lithium carbonate. Battery Grade Vis--Vis EV Grade Focus: Of the lithium carbonate produced by top three brine producers, only a small amount can be used for battery grade. The Company has dedicated all its production capacity to EV grade lithium carbonate. When in production, Galaxy will be the worlds largest supplier of EV grade lithium carbonate.
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Financials
Exhibit 23: Half- Yearly Consolidated Income Statement
Consolidated Statement Of Comprehensive (in 000 A$) Six Months Ended Particulars June 30th, 2010 Continuing Operations Other Income Administrative Expenses Exploration Expenses Share Based payments Other Expenses Results from Operating Activities Finance Income Finance Costs Net Finance Costs Loss Before Income Tax Income Tax Benefit Loss for the period Other Comprehensive Income for the period, Net of Income Tax Total Comprehensive Income for the period attributed to Shareholders Basic and Diluted Earnings per Share (cents per share) (Loss) per Share for Loss from Continuing Operations attributable to the ordinary equity holders of the company (cents per share) Source: RB Milestone Research, Company -6493 -42 -2641 -933 -10109 1023 -529 494 -9615 -9615 0 -9615 -5.83 -5.83 1 -1281 -15 -853 -70 -2218 23 23 -2195 312 -1883 0 -1883 -2.92 -2.92 411% 100% 100% N.M. 407% 180% 210% 1233% 356% 4348% N.M. 2048% 338% N.M. 411% Six Months Ended June 30th, 2009 % Change
Being an exploration stage mining company, Galaxy Resources currently has no production and consequently no revenues. The Consolidated Entitys loss after tax was A$9.62 million for the six months to June 30, 2010. Out of the total expenses of the company, Administrative Expenses rose by 407 % and expenses related to Share Based Payment increased by 210% in 1HY 2010. The net interest income increased by 2048% in 1HY 2010. The general exploration expenses for the first half-year of 2010 increased 180% from the same period previous year, as the company increased its exploration activity at the Mt. Cattlin site.
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Price Assumptions: We have assumed the price for lithium carbonate at A$6,000 per ton starting FY2010, and price escalation of 2% per year for the life of the mine i.e. 16 years. Cost Estimates: We expect the production cost of lithium carbonate to be around A$2,777.8 per ton considering the exploration of ore at its Mt Cattlin mine near Ravensthorpe, Western Australia, shipping to its lithium carbonate plant located in the Yangtze River International Chemical Industrial Park of the Zhangjiagang Free Trade Zone in the Jiangsu Province of China, processing and production related cost.
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We value the Company based on PV of cash flow which is expected to be generated from its Mt Cattlin Spodumene Mine and Jiangsu Lithium Carbonate Projects. Assuming discounting factor of 7.0%, we have arrived at a target price of A$2.03 for one year.
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Post tax Cash 105.19 108.78 Flows Discounted Cash 14.74 13.37 Flows Source: RB Milestone Research, Company Website
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We value the Companys battery plant based on PV of cash flow which is expected to be generated from FY2012. Assuming a higher discounting factor of 14.0% because of the riskier nature of the project, we have arrived at a target price of A$1.11 for the battery plant. Therefore, considering the upside from the battery plant, we arrive at a target price of A$3.14 for the Company.
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Exploration Risk: Exploration and mining of resources is a highly speculative activity, necessarily involving substantial risk. There is no assurance that the proposed exploration programs would result in the discovery of any minerals in commercially viable quantities Funding Risk: The Company needs significant capital to implement its business plans and to meet its working capital and other capital requirements. This is especially true for a company involved in exploration and mining activities. The gestation period in this industry is very long, during which a timely availability of funds is a necessity. If the Company fails to earn an expected amount of return, its reputation in the market would be hampered which might result in its facing future funding constraints Pricing Risk: The Jiangsu facility will have significant impact on the supply of Lithium to the Chinese market. Galaxy is relying on the disruption caused by new battery demand to enter the market with significant quantities. To locally absorb the extra material within three years, Chinese demand for battery grade lithium carbonate would have to grow at a 20% annual growth rate. Should this prove to be a problem, there will be an adverse affect on the pricing power of the Company Currency Risk: Galaxy has its mining operations in Australia, with approximately 60% of operating costs incurred there, while most revenues will be earned in USD or Yuan, hence a strong local AUD will impede profitability. This risk is greatest prior to debt repayment which is expected to be retired by 2014 Product Risk: Any operation will involve the risk of not meeting the expected quality standard for the products manufactured. There is a certain amount of risk that the plant may not produce the required grade of 99.5% lithium carbonate with the budgeted recovery of 85% Commodity Price Risk: Commodities are subject to high levels of volatility in price and demand. The factors that influence the prices of the commodities required for the operations are outside the Companys control. The impact of these factors cannot be accurately predicted Environmental and Health Risk: Mining has adverse ecological impacts such as pollution of air; drinking water; rivers and soils and loss of vegetation with substantial potential to harm human health. Hence mining and exploration activities require compliance with restrictive environmental regulations where the operator needs to put in place environmental protection to minimize the possible adverse environmental impact from operations. The cost of compliance with such regulations can be significant and, in some circumstances, prohibitive
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Management
Craig Leslie Readhead, B Juris, LLB, MAICD, Non Executive Chairman Craig Readhead has spent the last 30 years practicing in the area of mining and corporate law, with an emphasis on the acquisition and disposal of resource interests, joint-venture exploration and the development of mining projects. Craig is a partner of Allion Legal, a boutique corporate and resources law firm based in Perth. He is also the director of a number of listed and unlisted companies. Mr. Readhead has played a significant role and has advised on capital raising to develop a number of mining projects within Australia, Africa and South East Asia. He is a former national president of the Australian Mining and Petroleum Law Association and a former treasurer and vice president of the Association of Mining and Exploration Companies. Mr. Readhead holds degrees of Bachelor of Law and Bachelor of Jurisprudence from the University of Western Australia. He has served as director with mining and resources companies such as Agincourt Resources Ltd and Nickelore Limited, etc. Ignatius Kim Seng Tan, BSc, MBA, MAICD, Managing Director Ignatius Tan has over 24 years of experience including commissioning and operations management of several significant mining and processing projects in Western Australia. He also has a proven background in both marketing and business development. Mr. Tan has been in managerial roles in the chemical and mining industry including companies such as SCM Chemicals; Sons of Gwalia; Iluka Resources (MW); Imdex Minerals; and Metals X Limited. Ignatius managed the Lithium Mineral and Lithium Carbonate plants at Sons of Gwalia, Greenbushes operations in 1995. Previously, Mr. Tan held the position of Managing Director at Nickelore Limited. During his time at Iluka, Mr. Tan won the Prime Ministers Community and Business Partnership award for industry commitment to local communities in Western Australia. He is a former Chairman of the Western Australian Chamber of Minerals and Energys Murchison Regional Council. Mr. Tan was appointed as a Director on September 18 2008 and as Managing Director on November 11 2008. Anthony Tse, Executive Director Anthony Tse, a resident of Hong Kong, has worked as the Chief Executive Officer of CSN Corporation, a home shopping television channel in China. Prior to this, he has worked with the TOM Group for more than eight years in various roles, including those of strategy formulation, development and M&A. During his time with the TOM Group, he has also served as President of China Entertainment Television, a joint venture with Time Warner. Prior to joining the TOM Group, Mr. Tse has spent more than five years at News Corporations STAR TV. Mr. Tse is a former member of the Digital Information & Technology Committee for the Hong Kong General Chamber of Commerce. He was a board director and member of the Council of Governors for The Cable & Satellite Broadcasting Association of Asia. Charles Whitfield, Executive Director Charles Whitfield is a Hong Kong resident with a banking and finance background. He received his Masters in Business Administration (majoring in Finance and Strategy) from Columbia Business School (New York) in 1998. Mr. Whitfield is the Principal Investment Officer of Drumrock Capital, an investment firm providing capital and advisory services to start-up and early round companies. He has served as Managing Director with Citigroup where he held the position of head of the
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Galaxy Resources Limited corporate equity solutions group (Asia Pacific). Prior to this, he worked for Deutsche Bank as head of the strategic equity transactions group (Asia Pacific) from 2000. John Sobolewski, B Com, CA, Chief Financial Officer John Sobolewski is a qualified accounting professional and a member of the Institute of Chartered Accountants in Australia. He has more than ten years of experience in the accounting industry, including five years in executive roles with companies within the resources industry in Western Australia. Prior to this, John has served as CFO and Company Secretary of Vital Metals Limited and was a key figure in developing the companys projects. Mr. Sobolewskis previous experience also includes positions as Financial Controller and Company Secretary with Croesus Mining NL and Group Accountant and Company Secretary with Titan Resources NL. John was Company Secretary from July 1, 2009 until November 23, 2009 with Galaxy. He now continues as Chief Financial Officer of the Company and Consolidated Entity. Andrew Meloncelli, B Com, CA, F. Fin, FCIS, Company Secretary Andrew Meloncelli has extensive experience in the areas of corporate compliance/governance; finance; investor relations; prospectus fundraisings; systems implementation; and taxation. He holds a Bachelor of Commerce Degree from the University of Western Australia and is an Associate Member of the Institute of Chartered Accountants in Australia and a Fellow of Chartered Secretaries Australia, Taxation Institute of Australia and the Financial Services Institute of Australasia. Mr. Meloncelli started his career with Pricewaterhouse Coopers and primarily worked in various capacities for resources companies listed on AIM, ASX and TSX. Andrew was the founding Company Secretary of Novacoat Holdings Limited (now Decmil Group Limited) listing on the ASX in 2005, and is a former assistant Company Secretary of an S&P/ASX 200 Index Company. Terry Stark, General Manager - Australia Mr. Terry Stark is a mining engineer with more than 35 years of experience throughout Australia in the nickel, gold, manganese and chromite industries. Mr. Stark has broad experience in mine development and operation and has been responsible for the construction of two new projects in recent years. Terry is a former managing director of Millennium Mining Limited and Horizon Mining Limited and brings in extensive operating and project development experience. He is the holder of a West Australian First Class Mine Managers Certificate of Competency and a Quarry Managers Certificate of Competency. Anand Sheth, General Manager Marketing & Business Development Anand Sheth is a Technical and Marketing professional with more than 25 years experience in the international marketing and global sales of lithium and tantalite mineral products. For the past 10 years, Mr. Sheth has been the Lithium and Tantalum Marketing Manager at Talison Minerals Pty Ltd (ex-Sons of Gwalia Limited). During his time at Sons of Gwalia, Anand was a key player involved in developing the lithium business, growing sales by 150% within 5 years. Philip Tornatora, Exploration & Geology Manager Philip Tornatora is a geologist with principal experience in regional and near mine exploration and resource development. He has over 16 years gold and base metals mining experience focusing on Australia, Africa and South East Asia. Prior to this, he has worked with AngloGold Ashanti, most recently as District Geologist, Philippines, and prior to that as Exploration Manager, Mali.
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Disclaimer Some of the information in this report relates to future events or future business and financial performance. Such statements constitute forward-looking information within the meaning of the Private Securities Litigation Act of 1995. Such statements can be only predictions and the actual events or results may differ from those discussed due to, among other things, the risks described in Galaxy Resources Limited' company reports. The content of this report with respect to Galaxy Resources Limited has been compiled primarily from information available to the public released by Galaxy Resources Limited through news releases and SEC filings. Galaxy Resources Limited is solely responsible for the accuracy of that information. Information as to other companies has been prepared from publicly available information and has not been independently verified by Galaxy Resources Limited or RB Milestone Group (RBMG). Certain summaries of scientific activities and outcomes have been condensed to aid the reader in gaining a general understanding. For more complete information about Galaxy Resources Limited the reader is directed to the Company's website at http://www.galaxyresources.com.au/. This report is published solely for information purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any state. Past performance does not guarantee future performance. This report is not to be copied, transmitted, displayed, distributed (for compensation or otherwise), or altered in any way without RBMG's prior written consent. RBMG is not compensated for any analytical research and evaluation services that are performed for Galaxy Resources Limited, but RBMG has received cash compensation (under twenty five thousand US dollars) in exchange for other segregated services.
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