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.
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.
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.