This article was originally published at MF & Co. Asset Management.
Galaxy Resources shares (ASX: GXY) is a leading lithium miner in Australia owning 100% of Mt Cattlin mine in West Australia, Sal De Vida in Argentina and James Bay in Canada. ASX GXY shares own mines, which are cash flow generated and have abundant high-quality lithium assets.
However, the trade war between China and the US makes Australian lithium miners a confusing business. By joining the global lithium supply, GXY stock is subject to the global battlefield from overseas lithium explorers and miners.
About Galaxy Resources Shares (ASX: GXY)
Galaxy Resources shares (ASX GXY) is a public mineral resource company listed on the ASX. The company primarily focuses on lithium carbonate production and mineral exploration. Having benefited from it’s superior “lithium triangle” location, the company’s substantial lithium assets have positioned ASX GXY shares within the global lithium market as a heavyweight during a fairly short period. The company currently owns approximately $1.24 billion market capitalisation.
Among its peers, lithium and tantalum producer Pilbara Minerals (ASX PLS) stands out as holding one of the world’s largest lithium deposits in West Australia with an inferred amount of approximately 1.57 million tonnes. PLS’s market capitalisation is slightly higher than GXY at $1.39 billion. Another major lithium miner within the industry is Orocobre (ASX ORE), which occupies $1.31 billion market capitalisation.
ASX GXY Shares Is 100% Cash Flow Generated
At the current time, Galaxy Resources has locked in lithium production amidst an industry that is experiencing tightening supply. The 100% scheduled lithium concentrate generation from Mt Cattlin has been contracted with multiple Asian customers throughout the next five years in a pre-arranged agreement.
Another potential offtake to end-users is underway with automobile heavyweight BMW. Once the deal is officially signed off, a price surge is expected for GXY, as exemplified by the rise in PLS’s price after signing an offtake agreement with Great Wall Motors. The ability to undertake these agreements is primarily due to the industry’s diversified lithium asset. Holding properties in the world’s largest three lithium deposit regions secures ASX GXY shares’ lithium concentrate supply to meet increasing demand.
Nevertheless, the execution risk cannot be omitted. Although the lithium reserve in Sal De Vida and James Bay appears to be sufficient, the mines are both still under development. Questions should be raised about when to produce resources and how to control the quantity to maintain supply.
Another concern is from the monotonous product mix that at this period is lithium-focused only. Standing at the upstream of lithium value chain, ASX GXY shares is absent in the dominated value-added position as a cathode producer and lithium battery manufacturer.
ASX GXY Shares Will Be Welcomed by China As NEVs Demand Skyrockets
The strong growth in market revenue is outlined due to the snowballing demand for lithium feedstock. Both electric vehicles (EV) and energy storage (ES) are primarily the demand drivers within the global market. The forecasts show that the ES market is expected to double an estimated twelve times by 2030 as the industry gains momentum, projected by Bloomberg New Energy Finance.
Global Cumulative Storage Development
The world is desperate to pursue renewable energy, with worldwide support to accelerate EV adoption from governments as well as Automakers. The continually rising price proved this urgent need. To satisfy EV manufacturing, Automakers, or end-users, would rather pre-order and agree on offtake with a higher price.
China, as the main lithium importer, has set up an aggressive expansion of New Energy Vehicle (NEV). With 794k NEVs produced in 2017, China is now aiming at 7 million NEWs production by 2025. Leading global EV market by more than 50%, China is urgent for lithium supply.
Economically, the market sees a weak trend in the Australia dollar with the stimulation from the depreciated Australian dollar soaring revenue generated through the export lithium sale.
However, the sudden changes in tariffs between China and the US might leave the Australian lithium market in turmoil. An extra tariff is currently imposed on Chinese high-tech products, especially Chinese EV and lithium batteries however if Chinese NEVs were primarily domestically consumed, the influence on Australian lithium export would be minor, if any impact at all.
The exported lithium from James Bay in Canada is now subject to President Trump’s trade war with the potential higher feedstock price at risk of pushing China away to other exporters. Being aware of a slow supply-side response, China is seeking to take over Australian lithium miners. Should this occur, it’s expected Chinese manufacturers’ backward integration may push the price down leaving domestic miners in an unfavourable situation unless Australian regulation intervention is involved.
Disappointed Financial Performance: Massive Investment and Financial Expense
A high PE ratio of Galaxy resources shares at 7600 is much higher than other lithium miners, such as Orocobre (ASX: ORE) at 41.30. GXY stock is currently overpriced mainly due to investor’s overwhelming expectation of higher future revenue growth, as the industry PE ratio is only 7.27. Further explanation might be GXY’s negative EPS growth of -102.29%. Although the market performed worse with -400.21% EPS growth, Pilbara Minerals (ASX PLS) outperformed with a higher 82.4% EPS. The full repayment of OCP’s secured loan ($57,583,000), or financial expense, pulled the net profit down.
GXY stock’s profit margin (0.13%) is well below ORE’s profit margin at 32.55%. It should be noted though that impairment reversal of PPE contributed more than half of net profit before tax in FY 2016 ended 31 December. A similar position can be seen in GXY stock’s ROE. The ROE of GXY stock is 0.03%, compared to that of ORE at 2.54%.
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The lithium market is still fairly new in Australia and is supplying an industry in its infancy, so the volatile results and low returns don’t come as a huge surprise.
Potential Growth in A Changing Landscape
The surging demand for both EV and ES will push lithium production forward in terms of revenue and profit. Positioning in the Chinese market, GXY Resources shares will be exposed to both opportunities and threats. Offtake agreements have secured revenue from pre-orders, but lithium export from the James Bay project in Canada won’t be guaranteed if a higher tariff is imposed.
Investors still hold high expectation in ASX GXY shares. Although the financial performance is unsatisfactory, the profit margin would see an increase once projects in Argentina and Canada start generating lithium.
This article on Galaxy Resources is written by Henry Fung, Managing Director at MF & Co. Asset Management, a boutique investment firm based in Sydney Australia. For MF & Co.’s full website and further articles follow the link: MF & Co.