Galaxy Finds Solution To Brine Project Funding
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Galaxy Resources ((GXY)) has found a neat solution to its funding needs for the Sal de Vida lithium brine project in Argentina, brokers observe. The company has entered a non-binding agreement with POSCO to sell 28% of the Sal de Vida measured and indicated (M&I) resource for US$280m. This will enable Galaxy to largely fund development of the broader portfolio.
The company will also have a cooperation agreement with POSCO to maximise any development, infrastructure and logistical synergies. Galaxy retains ownership and the expected cash flow from the deal lifts Macquarie's target to $3.90 from $3.00. Beyond this deal, the main catalysts will be delivery of the project and the broader sector impact of competitor expansion plans.
All up, this is a better outcome than Macquarie envisaged. Delivering improved lithium recoveries at Mount Cattlin is still necessary for forecast cash flow but, longer term, a substantial brine project that has proven challenging for others becomes a key catalyst.
Canaccord Genuity considers the transaction a major positive, as it removes financial uncertainty and is also further evidence of the industry placing a high strategic value on quality lithium assets.
Galaxy Resources will sell the northern tenements, which do not include any of the reserve, and retain the southern portion of the project area, which contains all the 1.14mt lithium reserve and which forms the basis of the definitive feasibility study. The northern tenements host 1.6mt of contained lithium in M&I resources. Galaxy will also retain ownership of the bulk of the resources, which now stand at 4.09mt.
Macquarie calculates that on an M&I resource multiple, the sale price implies a valuation of $966m for the company's retained share, a 38% premium to the broker's valuation of 70% of the project. The deal is still subject to POSCO board approval, expected in the September quarter.
Macquarie upgrades to Outperform from Underperform on the back of the deal. While the broker expects the bulk of the funds to be deployed at Sal de Vida, the company is considered likely to further de-risk its funding requirement.
Canaccord Genuity expects the deal to provide a significant boost to the project's financing plans, noting that the company is yet to complete offtake arrangements that may still include product pre-payment. Combined with operating cash flow from Mount Cattlin, and the potential for debt financing, Galaxy Resources is now well-positioned, the broker suggests, without the need for diluted equity and/or a sell down of equity in the project.
Canaccord Genuity emphasises that the comparatively early stage of development, and the likelihood that POSCO will employ its, as yet unproven, proprietary lithium extraction process, will mean little in the way of commercial production from POSCO properties for more than five years. The broker, not one of the eight monitored daily on the FNArena database, upgrades its target by 22% to $5.00 and maintains a Buy rating.
While believing the deal is a positive development, Morgan Stanley has some concerns. Supply is being added to the market, as POSCO will operate independently and run a project in parallel with Sal de Vida, increasing global lithium supply. The broker already expects the lithium market to go into surplus in 2019.
Moreover, running two projects from the same salar requires significant cooperation on managing the draw rates, although this sharing is a common theme in Argentina where several companies, including Orocobre ((ORE)), are planning to operate in the same region. The broker suggests a government framework could also be devised for salar management going forward, although none exists at present.
Morgan Stanley also argues that while the reserve estimate is unchanged, the timing of the two projects may change the valuation as different areas are targeted. Citi believes the deal is a good outcome, as it allows Galaxy to largely fund its project without compromising on the intrinsic value. The broker agrees the deal highlights the build-up in supply, given there is likely to be two projects developed at Sal de Vida now.
FNArena's database shows two Buy ratings and two Hold. The consensus target is $3.56, suggesting 6.7% upside to the last share price.
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