Galena Mining [ASX: G1A]
Metals & Mining
A cash flow positive lead-silver producer
Galena Mining Limited (ASX: G1A) is a Perth-based base and precious metals company. Along with the JV (60:40) partner Toho Zinc (a leading producer of lead in Japan), it is currently focussed on the development of Abra Base Metals Mine (Abra) project. This is the first mine to be constructed in the Edmund Sedimentary basin (located in the Gascoyne region of Western Australia). It is one of the world’s largest and cleanest undeveloped deposits of high grade lead-silver deposits, with only c. 5-10% of detrimental components compared to typical lead-silver concentrates produced in the world. With the expected annual throughput of 1.3Mtpa producing 80-90kt of lead andc.500koz of silver, the company is set to deliver an annual average EBITDA of A$90-95m.
DFS reveals strong project economics; G1A is a pioneer in the region
Galena are pioneers in the untapped Edmund Basin region, where resources are located c.230m below the surface and have high value and high-grade deposits. The Abra site also assures impressive exploration potential with copper-gold mineralisation beneath the lead-silver deposit. Abra’s latest mineral resource estimate (MRE) study highlights 34.5Mtpa of resources @ 7-7.5% lead grade and 17-17.5 g/t silver. In addition, Galena’s published Definitive Feasibility Study (DFS) demonstrates exceptional project economics, with a pre-tax NPV of A$553m and an IRR of 39%.
Offtake agreement and supply deficit strengthen project viability
In Oct 2019, Galena and IXM S.A. (a Swiss-French base metal commodity trading company) established a 10-year offtake agreement for the supply of high-grade lead- silver concentrates. Galena will supply 65ktpa, covering 60% of Abra's output, at a premium to benchmark pricing and has the option to sell surplus production beyond the agreed offtake volume in the open market. This safeguards Galena from market volatility. In addition, according to the Silver Institute, the global silver market witnessed a second consecutive annual structural deficit in 2022 amid soaring demand and reduced production. Similarly, the demand supply gap for lead is expected to remain high in the foreseeable future due to the depletion of reserves and the lack of new mines. This provides G1A with a significant market opportunity for its surplus product.
Valuation range of 0.31-0.43
Using the DCF approach and conservative assumptions on commodity prices, we have valued Galena at A$0.31 per share in a base-case scenario and A$0.43 per share in a bull-case scenario. The target price range represents a Price/NAV of 0.25x, providing enough cushion for investors. We expect it to get re-rated as the scepticism on monthly production volume recedes. In addition, we expect the market fear of further equity dilution will fade away as accelerated production will push cash flows higher. The key risks remain to be higher cash burn in the untested region, capital raising risk and commodity price volatility.