Sunday morning and its raining hard here, so too bad if you...

Sunday morning and its raining hard here, so too bad if you didn't want to see another long post from me..


Most money is not smart. It's basically pretty stupid stuff.
It reacts, rather than predicts.

Stock A goes up. New buyers buy as existing owners of Stock A sell.
Stock price goes down. Then those new buyers get upset sell at a loss.
Ex-owners buy their stock back cheaper.

Endlessly repeat this cycle.
Watch it happen on range-bound Galaxy next week..
Shorting on way up 10% a day. Shorting on way down 40%.

Thing is, once in a while something massive comes along that disrupts how an entire sector works
and wakes up the financial sector because the bots suddenly explode.

It can only happen when something unseen arrives.

It also proves that the predictive and future pricing power of the markets, even with all that brains and computing at their disposal, is often very limited.

Very few bankers were calling the rise of lithium back in 2015.
It was retail that was watching the news and doing the sleuthing.

In 2016-2017 lithium surged because it finally had a business case for supplanting Oil.

Then - in 2018 lithium got disrupted by bankers.

Why did none of us predict how badly we would get disrupted?
Everyone in the tipping comp missed the farm, let alone the barn or the tiny little barn door on it.

When the best comp result is 100% wrong you know that something weird happened.

The reason?
It is always hard to predict the results of the combination of illegality and stupidity.

The big question we all have to answer here now is - how big has this last over-reaction from the markets been
and is there still enough financial charge in the batteries to revisit the old highs?

and
What has actually changed to support these kinds of valuations?

For Galaxy it has been 18 months of slaughter on the share price

while they did the following to “deserve” this punishment :

earned $400m from spare tenement sales, shipped 100s of kt of product at a profit, reduced mining costs by about 50%, commenced work at SDV on ponds and alternative extraction, proved up the resource and submitted fianl stage enviro plans at JB, increased resource at Mt Cattlin and produced a 3rd DFS at SDV.

Yep. That is what the company did. Slackers.

What the market did was to sell it back down to early 2016 valuation when it had $50m debt, owned only half of Mt Cattlin, no production and struggling to hold onto its international assets.

"Ok", says Mr Downramper — "surely the profits have dived?"
Actually - the profit margin has likely stayed pretty much stayed the same - because, even if the contract price has come off record highs and sits in the mid/high $600s, so have the costs now that YOP has completed.
Galaxy was struggling in 2017 with high costs, same as the new producers are now.

2 years later and Galaxy can continue to produce at prices that will put most WA spodumene production into C&M.
The other WA producers need prices to stay high for much longer to pay off debt and complete their commissioning and plant upgrades.
oh well. That didn't happen for them.
We'll see how many of the new WA producers are willing to produce at a loss and then see how much spodumene is being produced in H2.

Then we can look at how quickly spodumene prices rise once independent converters are starved.

Compare Galaxy in early 2016 (same market cap) to Galaxy now.
Detractors say its overpromise under-deliver.
Look at the actual results and what they did to "advertise" their operation initially.
Unlike PLS etc, Mt Cattlin was advertised on start-up as a 80ktpa operation.

It is now heading towards triple that.

Current valuation is a joke.
People are mistaking cheap for bad quality and ignoring value.
Management has been blamed for the shorting because they've been so focused on fundamentals.

"yeah yeah sure, AC. You're just as bad as the FUD spammers..."

We all talk up our book, myself included. Human nature is to be believe what you see.

Charts and graphs can lie and hide half-truths or be entirely partisan Fake News based on what they ignore.
You can say that you don't believe Chinese car sales and only accept US car data is relevant if that backs your argument.
It doesn't make it true. We are all prone to our biases.

My favourite fake chart is the bubble chart that compares Galaxy to other lithium companies, but based only on Mt Cattlin (pre resource upgrade). They never include SDV, and rarely JB, which would spoil whatever argument they are trying to make.
Competing brine plays do it the other way - only SDV and not MC and JB.
tricky tricky

Graphs and charts are fine to look at but I have pretty much come down to only watching 2 things.
They are my simplified measure of the future trajectory of lithium.

If there are changes with these 2 indicators, then I will reconsider my lithium investments.

One of them is what are the Big 4/5 lithium companies doing with their money?

Not the 100 gigafactories building downstream or the autocompanies or even Tesla - but the Big 5 raw material producers.

They are the ones in the same boat as Galaxy.

They have the most ability to see what is going to happen over the next period

because they have had the conversations with clients, auto companies, gigafactories

about real and potential supply contracts.
They can gauge demand by conversations with other suppliers and most likely to know their clients' plans intimately.

an example of this -
Galaxy's client Yahua has just doubled in capacity to process hydroxide and carbonate.
It would be reasonable to assume that Galaxy has looked at the possibilities of further expansion to Mt Cattlin.
Their client can handle it. And they would have known about this 6+ months ago.
Same goes for Tianqi etc. They are not expanding because they can not see the demand.
If the demand disappears, so will their plans for expansion.
In Galaxy's case, they possibly have bigger fish to fry than massive more investment at MC, but it does mean that Yahua increased capacity will mean they are much more likely to soon be able to take and process all the Mt C excess production that they can get.

The consistent response of the Big 5 companies is that they see a huge wave of demand coming, particularly as we approach the beginning of ICE sunset dates and the arrival of govt bans.
Most serious analysis see LCE undersupply on the cards although they still argue about when that commences in the 2020s.
Early, Mid or Late. Choose your flavour of analysis.
The under-supply is heightened by what is going on at the moment, as we endure a complete market over-reaction to perceived supply imbalance, damaging the ability for non-producers to get their toe in the water.
No new hard rock producer has commenced construction in Australia this year.
Only Wodgina is being built and there has been some news about Enviro problems slowing them down.
Greenbushes is not expected until late next year or perhaps, more likely, 2021.
btw I've been seeing some people totting up future Greenbushes expansion based on an incorrect base figure of current production
(note - check Bunbury port export data).

That the Big 5 are in the position to expand and take the lion’s share of the new demand is the common message they send, and it is a valid warning to new miners that they may well enter into a market place that will eat alive new players who are still holding debt, inexperienced management or incomplete plants.

We can expect a bit of bluster in the press from lithium companies keen to talk themselves up.
There are at least 3 companies that self-describe as The Biggest Lithium Company in the World.

No-one at all is forcing them to spend their money on new capacity or projects and they're not doing it for bragging rights alone.
They have the most ability to recognise over-supply and sit on what they have and not risk anything

but, instead, the biggest companies have all invested billions.

The entirety of their profits has gone back into more production and conversion capacity.

Brine is a bit unloved on HC - (ozzy miners - oi oi oi) but it has grabbed the most cash.

Tianqi - hard rock kings- took a massive position in Brine Kings SQM.
$4.1b USD - the biggest deal in Lithium History.

POSCO’s $400m for Galaxy is comparatively small but not bad for unDFSed tenements.

Cauchari, LAC both were funded and amongst their Big 5 backers are French oil company Total and Thai oil company Bangchak.

Then in hard rock. SQM in KDR. Ganfeng in GXY and PLS. Albemarle in Wodgina.
And of course all Lithium players have been steadily investing in themselves with every spare dollar.

Notable investments from outside the Big 5
- Norwegian Sovereign Fund in GXY,Tesla and SQM in KDR, Wesfarmers take over for KDR.

If I am permitted to pull out the cracked and chipped crystal ball for a second -

Of the Big Miners, we know only Rio has said they are actively chasing lithium assets. Jadar project isn’t exactly on fire.
They will want a little more of the action for their share holders to feel good about the company's direction.

BHP will stick to their strengths and do nickel as their battery contribution, likely taking over at least one large WA asset in the process.
Shell and the other old oil companies Aramco et are the most likely companies to make big Road to Damascus take overs in the next year or so.
The Saudis already hold huge positions in Uber, Tesla etc.
They’re the ones having the business model destroyed and headed for unemployment.

There are many more rumours now that an Apple car is actually coming, rather than just a software system, after more ex-Tesla hirings and some more leaks. Jonny Ives apparently was all hot and bothered about making it all out of wood for a while…

Any auto company still clinging to a petrol future is toast.

Back to the lithium companies -

GXY has been edged out of edging into the Big 5 but has also taken a leaf from Ganfeng’s main book and started “strategic” investments in A40 and LPD, presumably based on future valuations and performance that the market does not quite see yet.
Personally I think my own view, admittedly blinkered by short term disappointment in current share price, is that I'd like to see them sell both assets and use cash for buy-back and/or investing it in direct extraction tech at SDV.

The important thing to realise is that all the Big 5 now are brine + hard rock exposed companies with the exception of Livent (ex FMC) who are brine only.

You can argue that the Big Five are wrong and that they have made a big mistake, that they have overpaid for some of their assets or equity positions or are wrong to still be scaling up

but they certainly don’t seem too phased about it.

The investments still keep coming and Albemarle boss went public post-Wodgina about the fact that quality projects were still expensive, even though the stock prices were low.

POSCO just raised another $500m USD for more lithium materials/acquisitions with bonds.

These aren’t small amounts of money that are being moved around.

Tianqi’s new convertor plant in Kwinana is a $1b investment.
They didn’t even bother to build it at Bunbury port and will be trucking 250km from GB to Kwinana, rather than 100km to Bunbury.
I actually don’t know if that is so smart. It absolutely negates the lion’s share of the cost-saving of shipping less tonnage to China.

Please. Somebody explain to me why they didn’t build their convertor in Bunbury!!

Albemarle are building their smaller converter there and it makes sense.
Tianqi - not so much.

The only rationale I have is that despite higher capex, higher converter opex and higher transport, that Tianqi isn’t that worried about saving absolutely every opex dollar and clearly believes that there will always be decent margin on their spodumene.

or they wouldn’t be doing it this way. Simple.

(disclaimer: I have a family member working at Greenbushes. I want to see him keep his job too.)

So. That is Indicator #1 for me.

What are those that know the sector from the inside doing with their money?
They are not pivoting to other resources, despite the recent pressure on their stock prices.

They are investing cash as fast as they can in lithium, based on the future demand they can see.
As a side note - Galaxy management have never sold any of their shares.
What do they know that the market doesn't?

I agree with Simon Moores’ last report.
Simply calling over-supply and moving on is misreading what is going on.
You can have too much supply as convertors go offline to expand, and then be completely under supplied as they come back.
Yahua can now take 2 x Mt Cattlins. PLS is shut down. AJM isn't supplying them. A40 is struggling.
Even when supply is apparently plentiful, converters can't simply ask for the cheapest product, because the process to verify the product can take 6 months.
The most reasonable strategy for a converter is to lock in your suppliers, concentrate on consistency and quality of final product because good cathode makes the gigafactories happy. Do that and the relationship will thrive and there can be some give & take along the way with regards to contracts.

Look. The whole thing is so complicated that I can see why people are throwing their hands in the air and relying on their own gut, believing that low share price must mean that there is no demand, or deciding to characterise it in a different way that makes more sense to them - ie the iron ore resource model.

As SM says - Retail investors have become discouraged before the lithium sector has even begun its rise to dominance.

The actions and reactions of the big lithium companies tell a completely different story to the stuff you read on these forums.

Indicator #2 is What are the governments of the world doing?

I’ll start with the US, as its Tesla that probably kick-started the EV hype.
That’s where I’ll leave it too.

I’m not that interested in the US.

I see them as having resigned from the position of World Leader,
disinterested on a federal level in the climate or pollution issues that the rest of the world is tackling more seriously,

and have turned inward to focus on an apparently unfinished Civil War and Reality TV.

I said 6 months ago that Californian EV policies would be the road-test for Democratic platforms of 2020. Certainly seemed to frame Joe Biden’s energy/transport agenda.

We’ll see.

Elon is killing it with the vision thing and product quality, but I think the biggest mistake now is to look to the US for any reasoned or consistent policy position. If there are lower sales then I'd say that it was a tough time to be living in that country.
Green Dog will just have to eat Black Dog and compete on an unfair playing ground against subsidised fossil fuel.

Trump can change his mind after midnight any night of the week, and the funny thing is that even his supporters would have to agree that is how US policy is currently being determined.

To be fair to the US, I will also discount the impact of China.
If a Not-Very-Green (except California) US that does not want to engage with renewable energy from a federal level is to be left aside as a global indicator of lithium’s future

then

I will also ignore the impact of China’s absolute raging Lithium bull.
Let’s forget about how many gigafactories they are building and the 500 EV manufacturers.

Let’s forget about the increasing speed that they are rolling out charging infrastructure (did I read they just passed 1m chargers?)
Let’s forget about BYD’s giant bus factories

Let’s forget about the way they have welcomed international auto firms to set up factories to build their EV models

Let’s forget the eye-watering amounts of finance that they are pouring into every segment of the sector.

It may all be Fake News, after all.

It is like how @Metalduster said he was focusing on somewhere between the uprampers (presumably I'm on his list) and downrampers (asb,td,col) to find the more likely centre.

The US is not going to GO GREEN for at least 15 months and China is not going to weaken its 5 year plan built on the vision that removing petrol from their economy is their path to financial and environmental victory.

They may both be hardcore nuts that can’t see the forest for the trees.

Mathematically, they might even cancel each other out.

Of course, I’m only kidding.
China and Tesla is actually a perfect example of how the US and China can co-operate to solve immense technical and social challenges.

One has the scale and the other has the imagination and attention to detail. Perfect marriage.

Still. That is not where I look. I need something that is a more dynamic measuring device - not a doctrine.

My main interest is the the state of European support for EVs and renewable energy.
The fact that they make environmental policy for dozens of nations,

and have driven a very hard line against pollution and fossil fuel

DESPITE having some very tough internal economic challenges

is the real test. That means euro energy and transport policy has survived scrutiny and robust debate

and been embraced across the political spectrum.

There is strong bi-partisan support behind EVs, renewable energy

and batteries. The most interesting thing to me is that,

even as governments change hands between left to right , right to left,

there has been no back-sliding or relaxation of policy.

Instead, they have gone the other way. Sunset dates for ICE vehicles have been brought forward,

emission standards tightened, more vehicle exclusion zones, more funds raised for charging and related infrastructure, more support for solar/batteries.

The pragmatic German mind-set dominates and they have the strong economy, engineering/technical skills and social conscience to make it work.

German auto companies have embraced EVs just in time, with the scale of investment and technical skill to become the dominant players. Or at least to put up some resistance to US/Chinese domination.

Britain post-Brexit is the one to watch politically , because they won’t be bound by Eurozone policies.

Despite past inconsistencies, Boris Johnson has been very supportive of renewable energy, his rhetoric is about its capacity to create jobs and he sees it as the way to win elections with younger voters.
There has been no back-peddling his bike away from their emission targets or their plans to ban ICE vehicles.
His city of London will ban all gasoline and diesel vehicles and enforce electric buses from 2025.
Scotland follows in 2032. The rest in 2040. I’m betting that both these get brought forward to 2030.

So they are my 2 main fundamental indicators of what is going on in the sector.

1. How much confidence do the Big 5 Lithium players have in future demand, as measured by their willingness to invest in future production
and
2. Government support.

How strong is the political mandate?

How well do the Zero Emission policies survive election cycles and how strong is the underlying will and social conscience when there are many economic headwinds that push and shove?

And why is it that important to lithium?

The answer is : A ban is a ban is a ban.

We can talk all day about how long it takes for voluntary adoption uptake

but a sunset date is the end of ICE.

https://en.wikipedia.org/wiki/Phase-out_of_fossil_fuel_vehicles

Costa Rica ICE ban starts in 2021. ( I haven't recalled hearing this one mentioned before)

Norway, Netherlands in 2025.

7 more nations in 2030. and so on.

On top of that around 20 cities, mainly capitals have their own gasoline and diesel bans starting mainly in 2025.

They include Mexico City, London, Brussels, Paris, Rome(2024), Seattle, Vancouver, Auckland, Los Angeles(from 2030)

etc etc.

Obviously - it’s early days.

None have dropped off the list once they get on it.

The early adopters will solve the infrastructure issues for the rest of us and make it easier for the nations that follow.
Rich Norway dives in pretty much first with the financial fire power to solve any issues they come across.

They will then export that know-how as they once did as ship captains for the world.

And, as each new one joins the list, petrol becomes even more untenable from a business sense.

Norwegian EV sales have passed 50% already.

They replace their vehicles regularly in Norway so its likely you’ll start seeing the petrol bowsers start disappearing.
Then harder to find. Then gone.
Same as it will be in all the other places mentioned.

And then you don’t need govt bans any more because the tipping point was reached, the EVs were mass produced and cheaper anyway,
then there were no more petrol models being made

and by then the petrol companies will have all moved on and bought out all the lithium companies anyway…

And we still never even got around to quantifying the largely unfactored demand from India, the US when it votes Democrat, energy storage systems, grid batteries, home systems, giant battery systems to balance and protect the grid as solar becomes even more commonplace.

Looks like its stopped raining out there..
have a nice Sunday.
AC