The following are managements’ responses to shareholders’ frequently asked questions:
It is too early to advise the full impact COVID-19 will have on the lithium sector in the short term. The market for both spodumene and lithium chemicals remains in over-supply and until inventory positions return to more normal levels in both China and Australia, demand will be muted and prices will remain soft. Our long-term outlook remains positive with both industry and governments across the globe committed to the transition to electric vehicles (EVs). Significant growth from the rest of the world is emerging, with 32% yoy growth in EV sales in 2019, compared to China of negative 4% in the same period. Europe reported 119% yoy growth in plug-in electric vehicles sales in Jan-Feb 2020. The European market remains committed to their CO2 emission targets and this commitment is a primary driver for EV demand. In China’s latest development plan for the industry, the government has reaffirmed their targeted 25% New Energy Vehicle (NEV) penetration rate by 2025. Municipal and provincial stimulus packages have been implemented to support this. Globally, major automakers have made significant investments to transition to electric vehicles and remain on course to do so despite COVID-19. Positively, Galaxy remains poised to execute its growth strategy and position itself favourably for a period of market recovery.

The successful sale of Sal de Vida’s northern tenements to POSCO placed Galaxy in a strong financial position to execute its growth strategy in time for a period of market recovery. The Company recognises that its balance sheet strength is a key differentiator amongst its peers and aims to preserve this position.

Referring to the 2019 Consolidated Financial Statements, proceeds received from the POSCO sale were subject to tax including income tax of US$54.4m, dividend withholding tax of US$7.5m, and withholding tax of US$8.4m. In line with the Company’s corporate strategy, Galaxy deployed significant capital to optimise and advance its project portfolio. Capital expenditure in 2019 amounted to US$28.5m, including capital and exploration expenditure at Mt Cattlin of US$9.3M and capitalised project expenditure of US$13.9M at Sal de Vida and US$5.1M at James Bay. To unlock further value, there is also ongoing expenditure at Sal de Vida and James Bay.

Due to COVID-19, cost saving initiatives have been implemented across the organisation. In the March 2020 Quarterly Activities Report, the company announced a 20% salary reduction for the board and executive teams. Other companywide initiatives are also underway to preserve cash.

Galaxy is not proposing to use direct extraction technology under the optimised process flow sheet announced in 2019. The process flow sheet was selected on the basis of minimising capital intensity, technical and environmental risk amongst other factors. Alternative technologies were reviewed at that time and when considering Sal de Vida’s high-quality brine chemistry, it was determined that the simplified flowsheet adopted was superior across a broad range of project parameters.

There are multiple steps in the lithium ion value chain from mining and concentrating of raw materials, to conversion, chemicals manufacturing, battery production to final products (electric vehicles, electronics, storage and industrials). As there are multiple steps in the supply chain, and because Galaxy currently only provides raw materials to converters, it is difficult to state Galaxy’s exact contribution to particular end products. As a general indication, in 2019 lithium ion batteries contributed to over 60% of lithium demand and industrials (glass, ceramics, medical etc) made up the remaining. Electric vehicles (lithium ion batteries) are the main driver for lithium demand. We are aware of our customers producing both lithium carbonate and lithium hydroxide, in roughly similar amounts, therefore Galaxy is exposed to both major EV battery sectors.

We currently have one customer outside of China, however almost 100% of the world’s lithium conversion capacity sits in China. Until there is a build out of conversion capacity outside of China, most of our product will end up there. Of course we see diversification as a major strategic focus for the Company and our portfolio of assets allows us to focus on diversifying our customer base into the emerging markets of North America and Europe over the longer term.
2019 was a challenging year for all market participants in the lithium sector and this includes our direct customers in the conversion sector. We value the long-term relationships we have with our customers and are cognisant of these conditions prevailing the industry. Enforcing offtake volumes now would limit, and be detrimental, to our future offtake opportunities as there are limited customers in the market. Further, these customers have underpinned our current sales volume for 2020 and they have worked closely with us to uphold their end of the contract. In most cases our customers have not abandoned Galaxy for other suppliers – there is simply less demand for lithium chemicals, and many of the converter businesses are idle. We are in regular contact with our customers on shipping schedules and we remain ready to supply customers when their demand resumes.
In the Full Year 2019 Financial Results Presentation, Galaxy stated that it had reserved its rights and was investigating various ways to recoup all or part of its investment. Any significant or material advancements will be announced to the market.

Short selling is a legal form of trading that is largely out of Galaxy’s control. Many of these traders have taken a view on the lithium industry broadly and are shorting Galaxy and its peers. Lithium stocks are some of the most shorted stocks on the ASX and there are two other lithium companies in the top 10 most shorted list. The fact that Galaxy is an institutional grade company means that there is the ability for shorters to borrow stock which is not available in the non-institutional grade companies.

We have made contact with an investment bank who represents a large portion of this activity. They confirmed that the short position is largely driven by the lithium/EV thematic. Additionally, they confirmed that Galaxy’s short position compared to its peers doesn’t necessarily reflect their clients’ preferences but more the borrowing availability of the shares and utilisation. The underlying activity is representative of their clients’ views which is largely driven by machine-based decisions or what other funds are doing i.e. these funds move in the same direction.

The best way for Galaxy to combat the short position is to execute its growth strategy released in late 2019 and position the company for the inevitable market recovery in the lithium sector.

Additionally, Chinese walls exist between the buy side and sell side of any investment bank. This means that within the same bank, there are strict measures in place to ensure analysts operate independently from the broking side. This explains why you may observe a positive buy recommendation from analysts, whilst the same bank participates in short selling. This is a common occurrence and not unique to Galaxy.

Galaxy cannot control its share price due to factors outside of its control, however, we believe execution of our growth strategy will create the most value for shareholders in the long term.

Galaxy believes the best mechanism for long term share price appreciation is to successfully execute its refined and simplified growth strategy to create a sustainable, large scale, global lithium chemicals business. The Company has enhanced its internal capability to achieve this goal by recruiting a new CEO experienced in the full value chain of industrial minerals and bolstering its project development teams in Australia and in Argentina.

Whilst the share price is currently suffering from softer industry sentiment, the Board remains confident in the long-term strength of the sector and the rebounding of prices in the medium to long term.

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