Ramp up of next PLS shipment..., page-620

*The following are thoughts and hypotheticals that should be considered imaginative and my own personal opinion.

The prospect of spot sales may sound alarming to some. It has been a bit of a dirty phrase when it comes to Spodumene Concentrate (SC) producers in recent years as it was viewed as an indicator that offtakers weren't meeting volume commitments and these sales were assumed by some to be at pricing below existing long term contracts.

Now it is likely that some independent SC producers sold on spot to cover for customers reneging on volumes, it was not necessarily the case that they were always at a signifcant discount or lower at all.

My personal view was that holders of various companies from time to time - particularly when SC pricing collapsed - believed their chosen investment was still receiving contractual floor pricing well above published pricing from outlets like SMM, fastmarkets, asianmetal.com, etc or were somehow operating in a bubble that was not included in the data of those agencies.
I would like to think that most investors that have been around the sector for a while are now aware of certain realities.

So the pertinent question: Is it a bad thing for PLS to sell on spot if the opportunity arises? I would argue absolutely not.

First we should take a look at current pricing to gain an understanding of the market. While I assume SMM currently has a published midpoint of US$435dmt CIF China, the lowest midpoint of the cyclical low was only around 3 or 4 months ago at what I imagine was around US$385.

It is important to keep in mind that many were in denial that pricing from Australian producers ever even fell below US$400 or that if it did it wasn't applicable to contracted long term offtakes for a chosen project and was simply a reflection of small trades within China.
Now it seems some are celebrating the rise as SC pricing returns to the mid US$400s despite that previously being considered unacceptably low or outright misinformation.

The still low pricing is relevant to current sales decisions and expectations of how SC producers should proceed. I imagine some suggest incentive pricing for new investment is in the mid to low US$500s. The rebound in pricing has been much needed and the rate of increase has been very encouraging, yet we are a long way off what I would consider a fair price and certainly well below some of the broken contractual floors of producers. There is a great deal of idle built SC capacity, however much is committed to integrated operations and not available for independent converters, therefore to evaluate PLS one must consider the segment of the conversion market it operates within.

There is no denying long term offtakes are absolutely desirable for many good reasons, but it is not necessarily a great idea to have all production committed at all time: there are exceptions.

To obtain project financing, raise equity, or satisfy financiers, there is often no option but to sign and maintain a full slate of contracts to cover total production capacity at all times.

PLS finds itself in a different position right now: One that is very advantageous and provides considerable negotiating leverage with customers.

While there are multiple SC projects with built capacity in Australia, there are now only 2 that are operational and truly independent. One is GXY and the other is PLS.

Mt Marion offtake is currently committed to the needs of Ganfeng which has a 50% equity interest in the project that is operated by MIN.
Greenbushes supplies the Talison partners Albemarle & Tianqi, and it is operated in an integrated manner with no Chemical Grade SC sold to third parties. Greenbushes is heavily moderating Chemical Grade SC output with some suggestions that CGP2 is offline. Wodgina is on C&M however I am not aware of intentions to supply to anyone but Albemarle. Bald Hill remains the subject of legal maneuvers but is very much a marginal project that will require significant investment to lower costs to a competitive point when it is recommisioned.

Perhaps it is time to now look at the significant Chinese offtakers that deal with the Australian independent SC producers.

I'll start with GXY as it is important to recognize they have signed offtakes that will take them to the end of Mt Cattlin's current expected life of mine. Thus removing them as competition to PLS for new agreements.

Yahua is their major offtaker.
Chengxin (formerly know as Weihua) was an AJM customer but quickly signed with GXY following the appointment of receivers.
Meiwa (Japanese trading house that is a subsidiary of Mitsubishi) is worth noting to show GXY does not have capacity to add new customers. I imagine they are looking to transition away from a set annual volume and provide spot shipments on an ad hoc basis.

Now PLS.

Ganfeng is the most significant of offtakers being the dominant force in Chinese conversion. They primarily source SC from Mt Marion and had been supplementing additional needs with AJM and PLS product. It was my view that GF were playing the 2 suppliers off one another to ensure the lowest possible pricing, and given the sizable impact this had on published pricing it is quite possible it was able to suppress the price it was paying for Mt Marion product.

I imagine Ganfeng currently claim to have a 6 month stockpile of SC in China. This may or may not be correct but it is certainly plausible. In any event I assume they will need increasing quantities of SC from Australia going forward. Their plans in Argentina at the MineraExar Brine JV with Lithium Americas has faced significant delays and the Sedimentary (Clay) Sonora JV with Bacanora on Mexico is scheduled for construction to begin in 2023. GF may have approx 50% interests in each of those JVs. In the short term, GF have no practical solution but to continue to take product from PLS.

Yibin Tianyi of which CATL has an economic interest and appears to be playing the role of puppet master will need to take their commitment having commissioned 20ktpa of Hydroxide conversion capacity late last year and have an aggressive timeframe for an ambitious expansion of the facility.

General Lithium is another PLS offtaker with actual conversion capacity, while POSCO with its pilot plant in South Korea and potential plans to build a converter as a JV with PLS, and Great Wall / Svolt round out the list.

Now the question becomes: Which Chinese independent converters have found themselves without adequate supply.

Shandong RuiFu was mentioned by a previous poster as a possible current destination for PLS product. They are a former AJM customer. They do have a commitment to the Jiajika mine in China's Sichuan province (Operated by Rongda). I believe RuiFu still require additional supply from Australia to meet their conversion requirements.

ShanShan Lithium is currently constructing a Spodumene Converter and had signed an offtake with AJM last year that was on far from favourable terms and indeed deemed unfair by an independent report. AJM financiers gave them little choice but to sign an offtake that had a very low ceiling and despite claiming a "cost plus" floor price, in reality there was no solid floor as they could effectively match the price of any other AJM customer. This was an example of a deal where the SC supplier had zero leverage.

Jiangte Special Motor is an interesting one. Their converter had been the sole offtaker of Alita (formerly known as Alliance, and Tawana). The troubled converter went offline resulting in Alita going under. Last year GXY signed an agreement to supply, however shortly after, Ganfeng struck a deal to lease the facility for several years and an offtake was inked with AJM. Around the time AJM went into receivership, they backed out of the lease agreement.
I imagine Ganfeng felt the gas fired plant was too marginal to run compared to the coal fired converters it owns in China. While conversion costs would have been significantly higher than their other facilities, I assume the loss of supply from AJM was a major factor in the decision to pull out of the deal. Jiangte now finds itself without an Australian supplier of SC.

So in conclusion, I'll bring my thoughts back to spot sales and potential one off shipments from PLS.

While the December Quarter was extremely encouraging with what I imagine was around 70609dmt shipped, I believe there is capacity to supplement the requirements of PLS contractual offtakers with some spot shipments. It is my opinion that all the existing customers do not yet have the need for their full contracted volumes.

Spot sales will allow PLS to operate the S1 plant at capacity and minimize costs / maximize margins whichever way you want to look at it, to prudently manage cashflow without excessive stockpiling of product.

There are a several additional benefits:

Working relationships can be built and given PLS's position as one of the few global producers with capacity to supply independents they could be in the enviable position of being able to select the new offtaker that they are most comfortable with. We have witnessed several years where customers have screwed SC producers.

Those plants may begin qualification processes based on PLS feed, or fine tune plant lines to suit. This will further add to negotiating leverage.

If a long term deal is to be signed with RuiFu, Jiangte or ShanShan it can done at a point in time where the price environment for SC is significantly higher and will justify increased floor and ceiling.

PLS management may be looking for opportunities outside China, and I note entities have shown interest in constructing conversion facilities in Europe, North America, India, and Indonesia to name a few.

At the very least, spot sales would be a finacially prudent short term option to meet the gap between S1 capacity and the needs of current offtakers. It should also be noted that given the lack of alternatives for some of these converters, spot pricing achieved by PLS may be above what existing customers pay.


*Please note that this post is all in my opinion, often hypothetical in nature, and while my imagination does try to align itself with factual reality, details should only be considered informed guesses.