The Galaxy Resources Limited (ASX: GXY) share price could come under pressure after announcing a large writedown.
Galaxy is a lithium business that has hard rock mines and brine assets in Australia, Canada and Argentina. It also owns lithium production facilities. It wholly owns the Mt Cattlin mine in Ravensthorpe, Western Australia. One of Galaxy’s key assets is the Sal de Vida lithium project which the company says has the potential to be an excellent low-cost brine-based lithium carbonate production facility.
What Has Happened To Galaxy Resources?
The lithium company is preparing its June 2019 half year result. As part of that process it is reviewing its inventory on hand at Mt Cattlin, capitalised Mt Cattlin mine development costs attributable to the acquisition of General Mining Limited and deferred tax assets arising from capitalised tax losses.
According to Galaxy the review is still ongoing and will be completed before the finalisation of Galaxy’s half year report. However, the company is already expecting the review will result in an impairment in the report.
Galaxy disclosed it has estimated the impairment will be in a range of between US$150 million to US$185 million, which will be included in the June 2019 half year result.
Management said that adjustment from this impairment is a non-cash item and does not have any impact on cashflow, operations or banking covenants. However, although there’s no cash impact today, normally these types of impairments can mean that cash did leave the business at sometime in the past – eg perhaps a business overpaid for an acquisition that’s now worth less than before.
At 30 June 2019 Galaxy had US$176.3 million, marketable securities of US$27.2 million and no debt. So clearly Galaxy is in a stable financial position.
Is Galaxy A Buy?
I’m generally not a fan of owning commodity businesses because they have no control over the price they can get for their production. Demand for lithium may be increasing, but production is also increasing, so there may be no large benefit to Galaxy even with the growth story.
That’s why I would rather buy shares of the reliable businesses in the free report below instead.
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