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15/08/18

12:22

Post #: 34950531
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Originally posted by R66 ↑

Fundamental of GXY is subject to reconsideration

China's overall economy is not as good as it looks. Realistic GDP of China have been subject to much debate. China's debt level have risen drastically since 2008 reaching a new time high this year. The economy is now heavily leveraged on debt. If this debt level is handled by quantitative easing then the purchasing power will substantially reduce thus affecting the possibility of auto maker to continue sourcing lithium from overseas markets. This brings us to the next question.

Lithium inherently is not as rare element. Morgan Stanley's report holds a level of truth that lithium price might substantially drop. The opposite side of this argument is 1. Rising demand 2. Difficulties in entering production. Either of those is difficult to precisely predict at the moment due to complexities that and unforeseeable economic circumstances. MS’s report and report from various model are only predictions.

As China lithium market is what GXY is in, it’s important to understand Lithium price changes in China. Despite many have given optimistic speculations on lithium price in coming months, currently we have seen a drop of over 36% in the last 360 days according to ASIAN METAL. Regardless what good cheer is spread by those happy hopping rabbits, the market has spoken. It is now the clear fact that Chinese are unwilling to pay more for lithium. Anyone who is already invested in the market understands that price is merely a voluntary consensus of the value of goods being traded. Thus lithium seller/miner are ok to accept this lower offer from buyers. As I have pointed out in Charts before, GXY's lithium price have followed lithium price in almost the exact same pattern. Thus shorting stock based on the lithium index is one tool for increasing the possibility of profit when shorting. Again I'd like to point out that high volume shorting of GXY isn't because of the possibility of POSCO deal falling through, it’s been heavily shorted long before news of POSCO deal. The holders need to understand that shorting of GXY follow the market's bearish prospect on lithium price. Although I would comment that POSCO deal with place GXY in a significantly better financial situation.

Price of lithium is subject to much unknown speculation inherently increases risk exposure of the holders. Considering the current earnings of the stock, GXY is not much of a bargain as some suggest. This is clearly shown by the PE ratio, GXY's price at 4.50 had an unjustified PE ratio. The value of the share could only be justified from PE/G ratio because growth will sustain the share value. While PE/G ratio have been more than stellar in the past year the important question is can this be maintained. But with above factors mentioned growth at this stage is not ensured. It is however possibly to profit greatly from GXY. But of course, this association with high risks must be understood.

Subsidies given by government to EV industry is likely to help EV growth at in the current and the last quarter. EV maker needing to meet government goals is a possible catalyst for another jump in lithium price in coming months.

Once SDV and JB enter production without issues, GXY will be in a much stronger position than it is now. Even if lithium price is to drop in following years, higher amount of production and sales can compensate for lower profit margins. Lithium price projection with POSCO even showed a reduction in lithium price till 2020 where price will rise again after 2020. This model is again only a calculated speculation but gives more context for investors to consider their position.

Fixed price off-take agreement at MC gives GXY a much more stable financial health compared with many other lithium makers. This move of hedging against drop in lithium price is reflective of the visionary management we have. While reduction in lithium price might not affect GXY, the flip side of this coin is GXY will also not benefit from growing lithium price. If management is sure to do the fixed price deal then they are also aware of the possibility of profit margin to drop thus took action to hedge against the risk. The price of GXY at the moment is in my opinion attractive for long term investors with high risk tolerance who doesn’t need to perfectly time the entry.

Potential buyer in GXY must consider the above possibilities before being talked into this by family, friends or those habitual buy sentiments. It is in my opinion that GXY is a relatively high risk high reward investment with a maturity age of 3 years. Risky is multi-dimensional and different for every investor thus every investor should consider his own circumstances and set up proper risk management.

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Your argument is flawed in a number of areas.

China Pricing

Galaxy's PE Ratio

MS claims that the price might substantially drop when the big Lithium miners are receiving record pricing.

China's debt

But then all your recent posting here has been negative, so I guess it is no surprise.
GXY Price at posting: $2.59 Sentiment: Buy Disclosure: Held
2 Upvote

0 Great analysis

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