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Galaxy Resources share price slumps after $220 million impairment

The Galaxy Resources Ltd  (ASX: GXY) share price opened this morning 2% down and could slide lower today, after the Aussie lithium miner announced a $220 million non-cash impairment to the market.

What did Galaxy Resources announce?

Galaxy said that as part of its preparation of the financial statements for the half-year ended 30 June 2019 (FY19), it has been undertaking a review of its inventory on hand at Mt Cattlin.

Galaxy is also reviewing its capitalised Mt Cattlin mine development costs attributable to the acquisition of General Mining Corporation Ltd and deferred tax assets arising from capitalised tax losses.

Galaxy said that the review is ongoing and will be completed prior to the finalisation of Galaxy’s financial statements for the half-year ended 30 June 2019.

Based on current information, Galaxy anticipates that the review will result in a non-cash impairment for the half-year ended 30 June 2019, which is estimated to be in the range of US$150 million to US$185 million (A$222 million to A$274 million).

When finalised and reviewed by the auditors, Galaxy said the adjustment will be included in its financial statements for the half-year ended 30 June 2019, which are scheduled to be released in late August 2019.

Galaxy said that the adjustment arising from this impairment is a non-cash item and does not have any impact on cash-flow, operations or banking covenants.

At 30 June 2019, Galaxy held cash of US$176.3 million (A$261 million), marketable securities of US$27.2 million (A$40.4 million) and no debt.

Foolish takeaway

Despite Galaxy announcing it as a one-off, non-cash impairment, I’m expecting investors to punish the Galaxy share price in early trade.

The Galaxy share price has been hammered lower so far this year and is currently trading at $1.12 per share, having fallen a further 2% this morning on top of its 5% dive in yesterday’s market tumble.

Galaxy shares are down nearly 50% this year as the lithium prices have collapsed amid a demand slowdown and concerns over commodity pricing.

However, with the ongoing US-China trade war putting pressure on the S&P/ASX200 (INDEXASX: XJO), I think the latest significant impairment ahead of August results will see the Galaxy share price continue to slump towards the $1 mark this morning.

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Motley Fool contributor Kenneth Hall has no position in any of the stocks mentioned. 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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