Why Galaxy Resources Limited (ASX:GXY) shares will be on watch today

The Galaxy Resources Limited (ASX: GXY) share price will be on watch on Tuesday after the lithium miner released its second-quarter production report after the market closed yesterday.

Overall I felt Galaxy delivered a strong second quarter with improvements being seen across the board. Here is a quick summary compared to the prior quarter:

  • Ore treated up 1% to 436,296 wet metric tonnes.
  • Recovery rate improved 4 percentage points to 56%.
  • Concentrate produced increased 9% to 47,901 dry metric tonnes (dmt).
  • Concentrate sold increased 3% to 45,761 dmt.
  • Cash margin per dmt sold (including royalties and marketing fees) increased 22% to US$534.
  • Closing cash and liquid assets of US$84.8 million, up from US$60.8 million.

According to the release, the 9% increase in spodumene concentrate produced of 47,901 dmt was primarily due to the higher grade treated and an increase in recovery.

Pleasingly, these recovery rates are expected to be given a major boost in the next few months from the construction of the yield optimisation circuits at its Mt Cattlin operation.

Management has advised that these productivity improvement projects have been implemented with the aim of increasing overall recovery to a range of 70-75%. This is expected to result in an increase in annual production volumes to between 220,000 and 240,000 dmt. If all goes to plan these improvements in production rates will be realised in Q4 2018.

This could mean bumper profit growth for Galaxy if its cash margins remain favourable. The rise to US$534 per dmt in the second quarter was primarily due to lower costs of production and an increased realised price.

Should you invest?

I think this result demonstrated why Galaxy is one of the best lithium miners out there, especially given its burgeoning cash balance.

With US$84.8 million in the bank and a further US$280 million expected to come shortly from the sale of tenements at its Sal de Vida site, the company could soon have A$492 million in the bank. And if you annualise this quarterly result, it is generating approximately A$129 million in cash from its Mt Cattlin operation.

I think this makes its market capitalisation of approximately A$1.3 billion look quite cheap, just as long as prices remain favourable.

However, it is worth remembering that Galaxy and peers including Orocobre Limited (ASX: ORE) and Pilbara Minerals Ltd (ASX: PLS) are still high-risk investments that would be largely unsuitable to most investors.

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Motley Fool contributor James Mickleboro owns shares of Galaxy Resources Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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