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Galaxy Resources: A New Focus to Meet the Coming Lithium

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COMPANIES MENTIONED
Galaxy Resources Ltd.

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03/05/2015

Just two years ago, Galaxy Resources Ltd. was overleveraged and
unfocused. It had lost the support of the market and its shareholders. Today,
as Managing Director Anthony Tse explains in this interview with The Energy
Report, a new management team has exerted fiscal discipline, consolidated
assets and focused the company on its world-class Sal de Vida lithium project
in Argentina, positioning Galaxy to supply a metal critical to the explosion in
demand for modern electronics and transportation.
Source: Kevin Michael Grace
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March 2011, but was withdrawn at the eleventh hour, as it had unfortunately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 ($120M) 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 4550 thousand tons (45
50 Kt) is battery-grade lithium: 99.599.9% purity. Depending on which projections
you look at, global consumption is projected to rise to 200300 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 equivalentraw materialbeyond 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 sheetto 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 6070%, 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.
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 lithiumcarbonate 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 6070%
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. Its 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 $5,0006,000/ton. The DFS
forecast costs of about $2,200/ton net of potash credits.
But we expect that lithium prices will be more robust thenabout 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 andmost 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
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the following companies mentioned in this interview: None.
2) Galaxy Resources Ltd. paid Streetwise Reports to conduct, produce and distribute the interview.
3) Anthony Tse had final approval of the content and is wholly responsible for the validity of the statements. Opinions expressed are the opinions of
Anthony Tse and not of Streetwise Reports or its officers.
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