Galaxy Take Advantage of IPO
In a developing market which is expecting significant growth over the coming decade, some companies are attempting to set themselves apart from the competition. Alliance Mineral Assets and Galaxy Resources Limited are two of Australia’s Lithium producers. Galaxy is looking to share in the production from the Cowan Lithium project and has positioned itself to be a shareholder when Cowan Lithium eventually floats.
Demand for lithium is expected to increase five-fold over the coming decade. This outstanding growth is principally driven by the increasing push toward low emission transport with lithium-ion batteries in electric vehicles. In addition to this lithium-ion batteries will have a large impact as energy storage systems and portable electronics. The demand for the raw metal is predicted to increase by 20% per year to 2028. Given these numbers the lithium industry will require significant investment in new mines and process plants to match demand.
Lithium has a wide range of uses from medication to transport. The two main applications of lithium are as lithium batteries and for glass and ceramics. As such a large growth industry in the coming years, companies involved in the extraction and processing of lithium should expect to see some significant growth.
The price of lithium has continued to drop throughout 2018 and into 2019 after hitting a high of US$25,800/t in November 2017. Prices in early 2019 had fell to just US$11500/t. The significant run up in price during 2017 was propelled by strong and increasing demand from the lithium-ion battery industry and uncertainty over future supply. This run up in price attracted serious attention from investors and producers alike. Mining and processing activity saw a steep increase around the world particularly in China, Australia, Canada and Chile which squashed any fears of future supply shortages and saw prices plummet. China played a crucial role in the lower spot price with large increases in domestic production.
Currently trading at A$0.205 Alliance Mineral Assets Limited (A40) is a mineral resource company which produces commercial quantities of lithium at its principal project, The Bald Hill Lithium and Tantalum Mine. Alliance has a 15% interest in Cowan Lithium Limited, via its 100% owned subsidiary Tawana Resources, which owns the Cowan Lithium Project, adjacent to the Bald Hill project in Western Australia. In April 2019 Alliance achieved quarterly lithium production and shipping records from the Bald Hill and Tantalum Mines.
Lithium production for the March quarter was 68% higher than the previous quarter with 38,291 wet metric tonnes (wmt) of high-grade spodumene concentrate which produced 6.1% grading lithium carbonate. On the back of this news share prices soared from a low of A$0.155 to A$0.205.
Late April saw a pivotal deal between Alliance Mineral Assets and Jiangxi Special Electric Motor Co to operate a 50:50 joint venture to produce and sell battery grade lithium hydroxide (Hydroxide JV). The Hydroxide JV provides a unique and potentially prosperous opportunity for Alliance to participate in the downstream lithium products market over the next 6-12 months. This deal exposes Alliance to a potentially significant downstream revenue stream without incurring the costs of developing conversion facilities.
Galaxy Resources Limited, currently trading at A$1.56, has seen significant losses since the start of 2018 coinciding with the bear market in Lithium metal. After reaching a 7 year high of A$4.54 at the start of 2018 it has been nothing but pain and suffering for investors holding on to this stock looking for long term gains from the sector.
Fundamental issues continue to plague the company which has very poor cash flow for the amount of capital expenditure they have outlaid. A measure of how well a company utilises capital is the Return On Capital Employed (ROCE) metric. ROCE evaluates how much pre-tax income, as a percentage, the company earns on the capital invested in the business. The higher the ROCE the better usually as this means the company is generating significant profits from capital invested. The average ROCE in the Metals and Mining industry is 9.5%, given this we conclude that Galaxy is underperforming considerably compared to its peers. The business has been improving in terms of its cash flow over the past three years, before which is was unprofitable, but it requires much greater cash flow and revenue before being considered an attractive option in this sector.
The position Galaxy has taken to be a significant shareholder in Cowan Lithium when it eventually floats should improve one of the companies major pitfalls, cash flow.
As the bear market continues for Lithium it is expected that companies in the sector will follow along the same trend. Once Lithium market begins to trend upward again companies such as Alliance and Galaxy will benefit greatly from increased profit and return positive results to their shareholders.
By Scott Higgs
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