The Energy Report: Your experience in business is both extensive and varied. Could you describe your history and how it led you to lithium?
Anthony Tse: I have been in high-growth industries for the last 20 years covering the media and entertainment sectors, then subsequently Internet and mobile, and in recent years, resource and commodities – mainly in senior management roles, covering strategy, corporate finance, M&A, as well as operational roles. I joined the board of Galaxy Resources Ltd. (GXY:ASX), an Australian-listed mining company. I was initially in a non-executive role, assisting the company to (1) raise capital and (2) pursue a dual listing and initial public offering (IPO) on the Hong Kong Stock Exchange. The previous management team had been primarily of mining and operations background and less familiar with finance and capital markets. I was able to support Galaxy in this role, due to my previous relationships with strategic and institutional investors across Asia and internationally. The IPO was planned for March 2011, but was withdrawn at the eleventh hour, as it had unfortunately coincided with the Japanese earthquake and tsunami disaster, and capital markets during that period became very volatile. I remained on the board and assisted the company in raising about AU$120 million ($AU120M) that spring.
TER: Lithium is certainly a high-growth industry. What are the projections for growth in lithium demand by 2020?
AT: The world currently consumes about 160 thousand tons per annum (160 Ktpa) of lithium-carbonate equivalent. Just under 30% or about 45–50 thousand tons (45–50 Kt) is battery-grade lithium: 99.5–99.9% purity. Depending on which projections you look at, global consumption is projected to rise to 200–300 Kt by 2020.
TER: What is driving demand growth?
AT: The lithium battery sector. Within that, the current mid-to-low double-digit growth has been primarily driven by the consumer electronics segment. Laptops, tablets and smartphones are all powered by lithium batteries, and each generation of these devices is getting significantly larger in terms of energy storage capacity. For example, the first iPad had a 25 watt hour (25 Wh) battery; three generations later, its battery size had increased to 40-plus Wh, even as the tablet size remained the same. Bigger batteries mean more lithium.
TER: In addition to consumer electronics, what other sectors require more battery usage?
AT: One example is other energy-storage systems, including those for wind farms and solar panels. But obviously, what is grabbing the market's attention is the adoption of lithium as the preferred battery technology powering electric vehicles (EVs). We've all heard about Tesla Motors Inc. (TSLA:NASDAQ), but the likes of Nissan (7201:TYO), Toyota Motor Corp. (TM:NYSE) and BMW AG (BMW:GR) have also made big inroads into the EV space. Electric and Hybrid vehicles represented close to 4% of all vehicles sold annually in North America in 2013.
EV batteries, of course, are much larger than those used in consumer electronics. For instance, Nissan Motor Co. Ltd.'s (7201:TYO) Leaf has a 24 kilowatt hour (24 kWh) battery, the equivalent to 1,000 first generation iPads. And the Tesla Model S has up to an 85 kWh battery. So to have 1M EVs on the road would be more equivalent to Apple Inc. (AAPL:NASDAQ) selling 1 billion (1B) iPads.
TER: Can existing lithium producers meet this projected demand?
AT: Tesla's Gigafactory planned production capacity of 500,000 batteries per annum alone, depending on the size of the batteries, will demand up to 40 Kt lithium-carbonate equivalent—raw material—beyond current supply. We will likely face a mismatch between supply and demand. Many lithium projects are still very much at the early stage, and will still take three to five years to come online.
There may be projects, mainly in South America, that could come online to deliver needed supply. If all eventually perform at capacity, they would still produce around 50 Kt, against projected demand of +/-100 Kt. That's why we at Galaxy have chosen to focus on our Sal de Vida project in Argentina, which we bought in July 2012.
TER: What was Galaxy's focus when you joined in 2010?
AT: We held two assets then. We were in the final stages of constructing the Mt. Cattlin spodumene mine in Western Australia. This would supply raw material to the Jiangsu lithium-carbonate processing facility in China, then in its initial stages of construction. Jiangsu had a projected capital expenditure (capex) of $120-130M. That is why we raised money in 2011.
TER: You became interim managing director of Galaxy in June 2013. Your position was made permanent in November of that year. What challenges did the company face at that time?
AT: That year was very difficult for Galaxy. Shareholders wanted wholesale change across management and the board. The buildout of the Jiangsu plant had been delayed and there were cost overruns. Mt. Cattlin had not been producing to the grade that was expected. Galaxy was heavily indebted and overleveraged. By the middle of 2013, the company had about $110M+ of Chinese bank debt onshore in China, as well as $60M in convertible bonds. That $60M was faced with a redemption later that year, and about $50M of the Chinese bank debt was also due to be repaid that year. Yet the Company still needed more capital to ramp up Jiangsu.
My brief was to restructure the company and its balance sheet—to decrease debt, ramp up production, increase revenues and slow the cash burn.
TER: Take us through the steps involved in turning around Galaxy.
AT: First, we had to deal with the debt, about $180M total. We renegotiated and rescheduled with the banks and convertible bond holders, which was difficult because China as a country was going through its credit crisis during that summer. We managed to restructure almost all of the short term debt and made some nominal pay downs in 2013.
This made it possible to raise an additional $30M-plus. We then moved to reduce costs significantly across the board, at the corporate and subsidiary level. Next step was to increase production at Jiangsu, then running at only 20%+ capacity. Within six months, we got that up to 60–70%, which brought in much-needed revenue.
Last but not least, we began a consolidation of assets and focused on divestment initiatives. That process culminated in the Jiangsu operations now being sold to Sichuan Tianqi Lithium Inc., the largest lithium producer in China and the owner of Talison Lithium Ltd. (TLH:TSX), which has the largest spodumene resource in the world.
TER: How does the Jiangsu sale improve Galaxy's balance sheet?
AT: First and foremost, the $100M+ debt attached to Jiangsu has now been assumed by Tianqi. In addition, Galaxy will realize about AU$50M in cash.
TER: The sale of Jiangsu orphans Mt. Cattlin, does it not?
AT: Correct. Mt. Cattlin was put into care and maintenance in February 2013. On Feb. 9, 2015, we announced a new partnership deal on Mt. Cattlin with General Mining Corp. (GMM:ASX).
TER: What are the terms of this deal?
AT: General Mining will take over operations at the Mt. Cattlin mine. It will focus on producing tantalum, as opposed to spodumene. It will have the option to buy the mine for $30M and a 3% net smelter royalty within 3 years. In the meantime, with the project under Galaxy ownership, General will pay a lease of $2.5M/year plus a 10% production royalty. The deal essentially changes Mt. Cattlin from being a cash burn on care and maintenance to a cash-flow contributor on the order of several million dollars a year.
"The world currently consumes about 160 thousand tons per annum of lithium-carbonate equivalent."
With the Jiangsu and Mt. Cattlin deals, we have completed a turnaround. We have transformed our balance sheet and our cash flow situation.
TER: The Jiangsu and Mt. Cattlin deals leave Galaxy with two remaining assets, Sal de Vida in Argentina and James Bay in Quebec. What are your plans for James Bay?
AT: James Bay is a hard-rock lithium project, which gives us optionality should lithium demand go crazy. Hard rock projects are easier and faster to bring online than brine projects such as Sal de Vida, but are obviously of a smaller scale and probably less competitive on production costs over time.
TER: Could Galaxy sell James Bay to raise capital to bring Sal de Vida to production?
AT: That is a possibility, but probably least likely. We have several options on how to finance Sal de Vida into production.
TER: A definitive feasibility study (DFS) of Sal de Vida was published in April 2013. Shortly after that, Galaxy decided to make it its flagship project. Why was that decision taken?
AT: We knew Sal de Vida would be the flagship when we acquired Lithium One's assets in 2012. Brine projects are not only competitive on a cost basis, but they are typically much larger than hard rock in terms of volume. But the top priority that year was to really fix the various issues financially and operationally, in order to first save Galaxy. We knew clearly that we needed a restructured balance sheet and financial position before we could think about how to advance Sal de Vida.
TER: How has Galaxy's plan to bring Sal de Vida into production been modified since 2013?
AT: Sal de Vida is a very large project. It has about 1 million tons (1 Mt) of lithium-carbonate equivalent. It has about 4 Mt of fertilizer-grade potassium-chloride (potash) equivalent. The 2013 DFS called for a 25 Ktpa lithium or battery-grade lithium carbonate capacity and 95 Kt potash capacity. That would have required a $369M capex.
We're now looking to develop Sal de Vida in stages. Phase 1 would produce about a third of the total design capacity, correspondingly the capex would be reduced to about $120M.
TER: How do you plan to raise that money?
AT: We've already had discussions with Chinese banks active in Argentina, such as the Industrial and Commercial Bank of China (ICBC) and China Development Bank Corp. (CDB). We believe Sal de Vida can probably be financed on a 60–70% debt-equity basis. That leaves the equity component being required of only $40–50M.
We own 96% of Sal de Vida and have had proactive discussions with potential joint venture (JV) partners to raise equity at the project level. Selling a stake to a JV partner would give us the capital to advance it to production. We do not plan to return to the equity markets.
TER: Are you investigating offtake agreements?
AT: Acquiring JV partners for Sal de Vida may involve offtake agreements. One of the benefits of having built and operated Jiangsu is that we have nurtured a solid base of over 40 customer relationships throughout China and North Asia, including Mitsubishi Corporation (MSBSHY:OTCPK) in Japan.
We've retained the team that built out and ramped up Jiangsu. It’s important to note that Galaxy has not only built a lithium project into production, but has also sold lithium into the market. The marketing component of this business is critical.
"Over the last four years, we've taken two different projects through development, construction, commission, large scale production and sales to actual customers."
TER: Where does Sal de Vida stand in terms of permitting, infrastructure and power?
AT: Permitting is now complete for the two Argentine provinces that Sal de Vida straddles: Salta and Catamarca. In terms of power, our team has recently procured the necessary resources. All that remains is the right financing structure.
TER: When do you anticipate Sal de Vida Phase 1 to begin production?
AT: We want to time production to anticipate what we believe will be a bullish lithium market, which we think will materialize in late 2017 or early 2018. Obviously, to develop any brine project, you need a construction period for your ponds, and then to build and commission the plant. This would take up to three years, which fits nicely with the timeline above.
TER: Could you give us an idea of what you expect from Sal de Vida once it begins production?
AT: The 2013 DFS was modeled on $5,500 per ton sold of battery-grade lithium carbonate. That price today is at the high end of $5,000–6,000/ton. The DFS forecast costs of about $2,200/ton net of potash credits.
But we expect that lithium prices will be more robust then—about US$7,000/ton or higher, due to continued increase in demand.
TER: In December 2014, Galaxy appointed a new chief financial officer (CFO) and a director of investor relations (IR). What do they bring to the company?
AT: Rowen Colman, our new CFO, brings a couple of decades of experience and is a great fit with our new management culture of financial discipline. Our IR director, Nick Rowley, has been very active in the capital markets and corporate finance space and plays an important role as Galaxy re-emerges back into the market to interact with institutional investors.
TER: Martin Rowley, Galaxy's chairman, came over from Lithium One. How important has he been in maintaining continuity with regard to Sal de Vida?
AT: Martin is one of the cofounders of First Quantum Minerals Ltd. (FM:TSX; FQM:LSE), one of the world's biggest copper producers. He has a fantastic track record. Besides the continuity he has provided, he has given me and the rest of the management team strong strategic guidance. And his appointment as chairman was critical to market support of our rights issue of 2013.
TER: What differentiates Galaxy from the other lithium players in the market?
AT: There are many lithium projects out there. Some are more advanced than others. Some have not completed a DFS. Others are closer to production. We at Galaxy have a team that has, over the last four years, taken two different projects through development, construction, commission and large scale production, and built a business that actually sold the product to customers.
Second, it's important to remember that lithium is not a commodity. It's a specialty chemical. And the marketing expertise we have is essential in that business. We have been selling lithium into the market for years. Some peers will have a steep learning curve in front of them in terms of (1) getting an operation into production, (2) getting it to produce according to capacity and specification and—most important—(3) getting the market to accept their product.
TER: How long before the market comes to appreciate Galaxy's value?
AT: After the Jiangsu and Mt. Cattlin deals are completed, we believe the market will recognize that our balance sheet issues have been resolved.
When you consider our share price and market cap, the market has basically discounted any value in the company and attributed zero value to our projects, such as Mt. Cattlin and Sal de Vida. We believe that going forward, investors will see there is now a lot of value to be unlocked.
TER: Anthony, thank you for your time and your insights.
Anthony Tse has been managing director of Galaxy Resources since June 2013. He has 20 years of corporate experience in numerous high-growth industries, including the technology, Internet and mobile, media and entertainment, resource and commodities sectors. He has worked primarily in senior management, capital markets and merger-and-acquisition roles across greater China and the Asia Pacific. His previous management roles include various positions in News Corporation's STAR Group, the deputy general manager of TOM Online, director of corporate development at Hutchison Whampoa's TOM Group and President of China Entertainment Television, a TOM/Time Warner joint venture. He is a fellow of the Hong Kong Institute of Directors and a member of the Hong Kong Mining Investment Professionals Association.
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1) Kevin Michael Grace conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
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