Australia’s premier lithium miner, Galaxy Resources Ltd [ASX:GXY], has seen its share price sink over 40% during the past 12 months.
The market has struggled to find value in the global miner despite reasonable financial results and a slew of what should have been perceived as good news.
What has caused Galaxy’s share price to drop?
Source: Trading View
From the two graphs above we can see that the GXY price (below) closely follows that of the lithium price (above) since January 2018.
However, we can seem some divergence from this relationship starting in January of this year, where the lithium price has begun to bounce back but GXY’s share price continues to slide.
Well, amongst other things, there seems to be a lot of people betting against Galaxy. After seemingly good news yesterday about coming to an agreement with the Cree Nation at their James Bay project, over two million shares were shorted.
But their bet could pay off. It’s still unclear where the share price will stop — but it seems it still has a way to go.
Right now, Galaxy’s assets are tied up in red tape and the company has been forced to sell off some of its non-core assets to fund its core operation.
In February, GXY sold off its tenements located on the northern portion of the Salar del Hombre Muerto to South Korean miner POSCO for about US$280 million to develop its Sal de Vida project.
However, they have had issues with finding a strategic joint venture partner to operate the Sal de Vida project. The company also has to worry about a new 12% exports tax that came into effect in Argentina at the beginning of this year.
The low lithium price has also caused concerns about the size of the cash flows from GXY’s Mt Cattlin project in WA.
It makes sense why investors are pessimistic about the short-term future of the company. GXY will have to spend significantly to get its Sal de Vida project off the ground — in an adverse tax environment too — and dwindling cash flows will mean haemorrhaging the bank account.
Now, with news announced yesterday with GXY entering into a pre-development agreement with the Cree Nation regarding the development of the James Bay Lithium Mine Project, the company must outlay more money to begin development.
What’s next for Galaxy’s share price?
Galaxy hit a new 52-week low today at $1.815, but, despite the bad run, the company does have a lot of upsides.
Galaxy holds some very attractive and high-quality assets around the world and has a solid cash balance (for now). Pushing forward with the James Bay project will further diversify the company’s cash flow streams once the mine is operational, providing more long-term value.
But unless the lithium price improves, it’s unlikely we’ll see any significant improvement in the Galaxy share price in the near-term.
For Money Morning
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