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Galaxy Resources Limited (ASX:GXY) shares slump on half year results release

The Galaxy Resources Limited (ASX: GXY) share price has sunk lower in morning trade after the release of its half year results.

At the time of writing the lithium miner’s shares are down over 2% to $2.87.

In the first half of FY 2018 Galaxy generated revenue of US$88.4 million and net profit after tax of US$11.5 million. This was a 682% and 331% increase, respectively, on the prior corresponding period.

The driver of this growth was a 62% rise in spodumene production to 91,800 tonnes and a 140% increase in its cash margin per tonne to US$488 per dry metric tonne. This was largely the result of the company benefitting from a higher realised selling price for its spodumene.

Galaxy generated US$31.2 million in operating cash flow during the first half, finishing it with a cash balance of US$45.1 million. This cash balance doesn’t include the recently announced US$280 million sale of tenements in Argentina to South Korean conglomerate POSCO.

Looking ahead, the construction of yield optimisation circuits at its Mt Cattlin project has commenced. This is expected to increase recoveries to a range of 70-75%, which should lift annual production volumes to 220,000 to 240,000 dmt. Production improvements are expected to be realised in the fourth quarter of calendar year 2018.

Should you invest?

I thought this was a strong half from Galaxy and feel it demonstrates why it could be a great option in the industry along with the likes of Orocobre Limited (ASX: ORE) and Pilbara Minerals Ltd (ASX: PLS).

Galaxy remains my preferred pick, though, largely due to its strong management team, hefty cash balance, and high quality assets and operations. However, as great as the company is, a lot of its future success will come down to where lithium prices go.

While I’m optimistic that prices will remain favourable and allow bumper profit growth and strong cash flow generation in the future, there is always a danger that prices will collapse from oversupply.

Because of this, I feel an investment in the industry is high risk and not suitable for all 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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