The plan to negotiate a new price for the 2017 shipment was set out as far back as April by Anthony Tse at the Swiss Mining Institute presentation.
We were always expecting this to be re-negotiated.
In fact, it's something we have been looking forward to as this was always going to happen when there was no other competition.
It's the opportunity to capitalise on a period of extreme supply shortage of spodumene, in the independent sector and at a time when the Chinese clients will be able to verify the quality of the concentrate from Mt Cattlin - which should be approaching the same high grade that PLS has suggested they will have down the track.
At the moment, some hard-rock processors in China are running on nearly nothing - trying to process low quality lepidolite which requires a massive amount of material to refine into carbonate.
Mt Marion and Greenbushes are both locked into their respective vertical integration with Ganfeng and Tianqi/Albemarle. They are not competing with us for this sector. If anything, they have improved the prices and demand for Galaxy by Greenbushes' decision to withdraw supply outside their own tolling processors.
Anthony Tse has continued to be bullish on receiving an increased share of processor profits - saying that he expected at least a 20% increase on spodumene pricing. This year's $600/t price was a record-setter but was simultaneously also a bargain for the clients given that the processors bank everything above the approx $10k/t cost price mark as a profit. It's hard to figure on exact spodumene processor costs as it varies from processor to processor - somewhere in the admittedly wide gap of $3k-$6k/t. At 8 tons of spodumene for 1 ton of carbonate - they are only paying Galaxy $4800 for a resulting ton of carbonate.
The trade-off for the first shipment was that Galaxy would receive 50% pre-payments for the first and second shipments and balance payment via Mitsubishi (guarantor) as soon as it is FOB. The received pre-payments have been put to use upgrading the mine and paying down debt.
It doesn't look any other lithium company will get the red carpet rolled out quite the same.
As soon as we get our shipment away we are due balance payments for 50% of 45kt, a full payment for 15kt (either spot market or added to the first shipment to make it up to 60kt) and 50% of 2017's 120kt to be paid.
Get your calculators out and run the numbers.
No mention has been made very recently about this 15kt shipment for the spot market. Perhaps to lock in these 2 clients the extra 15kt will go to them instead to keep them happy about the delay? Would seem a good friendly gesture. We know they want as much product as we can make.
Galaxy directors (esp Fotios) have now elected to pay for their options early to chip in some extra operating cash to get us through the gap. It's a good gesture and shows us they believe in what they're doing.
Back to the "derivatives of lithium prices" thing.
As I mention above - spodumene processors are banking huge profit margins off hard rock.
Somewhere in the region of $10k USD/t.
In the end it is cheaper and easier for the Chinese to build processors than establish mines.
I have never liked the idea of Galaxy building another processor.
Jiangsu was enough of a disaster.
Now it would be even worse. Any new processor built by an Australian company would be in direct competition with mainland Chinese hard-rock processors.
To build one in China would be Jiangsu all over again. Malaysia may end up the same.
The companies planning to compete on processor production cost with their processors may find it very difficult to say the least.
I don't know how many Australian companies who are making noises will actually try this - PLS,NMT? Could equally become the boat anchor projects that weigh them down like Jiangsu was for GXY.
Processors need to lock in supply but at the same time compete with each other for quality and price. They may get to a situation where they need to bid up a better ore price to secure supply and simultaneously lower their profit margin at the factory gate.
In short - imho - the effect of any price squeeze will be inflicted on the processor side. Processors could easily afford to pay much higher per ton of spodumene and still be making a great money, particularly if they are one of the low cost processor factories.
Lithium is a complicated, opaque world.
I don't think it makes any sense trying to see much further out than 2 or 3 years at this point.
It's probably completely impossible. Mac bank did not reference where they drew their figures.
It seems like pure guesswork and that is really unfortunate that they didn't at least visit China and talk to the companies there who are building the processors, batteries and vehicles to get a feel for the real demand picture.
That 2-3 year time period would suit probably 90% of investors here at the moment.
Galaxy share price should have put on quite a bit by then and hard to resist the profits for anyone who is still around from these days.
Very hard to see any over-supply in hard rock for this period simply because the competing hard-rock companies have not even reached DFS.
Easy to see the second wave of miners being 2 years away from first shipments even for the ones who are just about ready to get going?
By the time the other miners are appearing on the scene Galaxy is likely to be producing brine.
It seems the perfectly timed counter-balance to then move on to bring on a lower cost supply.
If lithium price is under pressure at that point - the ones with brine will be the ones to stay in the game.
At least we'll get the answers to how well Galaxy is going to do for the next year soon enough.
Roll on December.
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