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The Dean

13,330 Posts.

1233

10/12/17

10:51

Post #: 29514725
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Originally posted by airconditioner ↑

I want to take a better look at the Deutsche Bank argument.
I'm pretty sure its behind today's stupid action.
Its a bit like last year's Mac Bank thing - but they were "its just a vibe type thing".
DB should know better.
They are basically saying that MIN's future DSO production will force prices down once they get up to 300-500kt per month shipping.

MIN has yet to either produce any costs or to achieve the rate at which DB assumes but I read a report a month or so ago that said they were estimating this may occur by the end of next year.
Its awfully vague at this point to be worth the column inches.
Its not even known if there is the Chinese capacity or capability to handle this raw product.

Remember - DSO is basically dirt. Not lithium.
It is 2 processes away from lithium carbonate.
The first is approx 10:1 for spodumene/lithium concentrate.
Then 8:1 of that product to carbonate.
DB provide a calculation that equates to approx 72tons of DSO for 1 ton or resulting concentrate.
Its like a carrot farmer saying F*** it.
I'm not going to pick 'em. I'll just back hoe off the top 3m of soil and send it to Coles.

At the end of a whole year of shipping this quantity (3.6 - 6 million tons of Western Australian dirt with some lithium in it), and after the Chinese have paid for first concentrating it (as in replicating what Mt Cattlin does) and then converting it in a carbonate/hydroxide processor - that they will end up with 50-80kt of lithium supply.

DSO is not a good solution to lithium supply.
Its a short term strategy for companies without spodumene plants.
MIN are lucky to have an iron ore operation and their own trucking fleet, but its a large amount of waste that they are shipping. All DSO contracts that have come up so far have been CIF (Cost Insurance and Freight), not FOB (Free on Board) - meaning the miner covers transport and insurance.

That alone adds enough costs to make Mt Cattlin immediately far better value for a finished product.
The Chinese will have to build or upgrade local lepidolite plants to process this ore and unless they are located right at the port, there is another substantial trucking costs that they will wear.
Then it has to be processed.

MIN have raced into lithium and applied their iron ore minds to the scale, but not the technical requirements.
If Mt Marion is going so well - why not buy out NMT?
Something doesn't add up.
The whole DSO thing could still go belly up when they finally run the numbers and realise nobody is making any money from it.

But.
Consider if DB are correct about DSO. The Chinese have access to a new 50-80ktpa supply of lithium sometime around late 2018-2019. Some would even say - phew - we were getting worried and that keeps lithium supply on track in a period where nearly everybody has been overly optimistic about when their projects are going to start.
However, the costs associated with all the transport inefficiencies end up making DSO-ed lithium the most costly lithium ever produced on planet earth. In the most short-sighted venture so far, MIN hand back the vast majority of their profits to China.

For example - what good is somebody willing to supply a 100 ship loads of gold at twice the price of regular gold.
What happens to the price of gold?
There is now more of it - so going by increased supply you would naturally assume it would get cheaper.
But no. This new supply introduces such a high production cost and it can't be sold anywhere near the old market price.
Price goes up. Or that supplier has simply produced a product that no-one would ever buy unless it was the last resort.
And that is precisely why they're getting away with it now.
Lithium prices are stilling going up and production is not coming on fast enough.

What would happen to cheaper suppliers like Galaxy?
Galaxy is producing the 8 tons of spodumene required for a ton of carbonate/hydroxide for approx $4k.
(with costs said to be coming down further).
I don't know latest shipping to China prices but I've seen a range of $20-50/ton.
Before even an ounce of that tonnage is processed the DSO product is already way behind.
Shipping is 10x.

There is a real reason that Tianqi is building a processor in Kwinana.
It is to specifically avoid this shipping expense.
MIN have turned it upside down. DSO does not add downward pressure on price.
It pushes it up.
Plants that can process lithium concentrate are suddenly that more valuable.

And why are they doing this at all?
Was Mt Marion so much of a disaster that they realise
that they can't do it again?

So what happens if MIN get going as a major supplier by the end of next year?
Their product is inferior and the Chinese need to process every one of those tons twice to turn into carbonate/hydroxide.
I see DSO as a gift for spodumene pricing.
I'd estimate that costs alone would bring it close to $10k/t for the final carbonate product.
More than twice as expensive as the most expensive production today
and 3+ times more expensive than brine production.

If the Chinese want to actually get a profit from lithium production then it will place a long term pressure on pricing upwards. That 50-80ktpa is going to be at super deluxe pricing.

Why would Galaxy sell spodumene any cheaper than the market was willing to pay for DSO-ed product?
Answer: It wouldn't.
Despite potentially more product entering the market , the competing product is more expensive and Galaxy can just charge more and pocket the profit.
Eventually more hard rock mines come on with plants and DSO is dead in the water.

Interesting and very disappointing that it was Galaxy that was the one put under most pressure today, because if this plays out more widely then it will actually be all the lithium projects without a mine, that are at least a year or so away from commencing shipping that will get more than a dose of short-selling.

MIN's DSO really isn't our problem.
Its the specs who need to worry.
How they fit in as new entrants when some analysts are saying - its ok - existing producers have got this.
What do they do if MIN are willing to really sell Australian lithium miners short by normalising shipping of unprocessed raw rock?
Do they all try to go DSO and try to join the game?
They will only succeed in starving their operations of cash, selling their resource cheaply and cutting their own throats in a race to the bottom. They are all already in a race to come to market before brine production increases.
It would only make it worse.

Meanwhile Galaxy's Mt Cattlin's product has a massive cost and quality advantage over DSO-ed ore and they will have the money to invest further in brine and vertically integrated hard rock in Canada.

If you want my guess as to what is going on now I would say MIN and Deutsche Bank have teamed up to sucker punch the speculative mining sector with yet another round of BS about over supply and a giant ramp of their investment in MIN.
If they can throw enough doubt on supply then the other newbs will suffer a lack of confidence and funding.
PLS just scraped in the door with some cash but will need some more.
MIN have shown themselves very willing to be litigious with them and a little devious.
Is this actually a missile aimed at PLS/KDR's future - but hit us instead?
At the end of the day MIN have yet to produce any costs or get anywhere near this level of production.
This is just another bank letting their analyst push a sensational story at the media.

The real measure of its truth is the lithium price. That is continuing to stay strong.
Its all more fuss about future impact of future production while ignoring that
one large car manufacturer could swallow MIN's supply in one gulp.

Galaxy is collateral damage in this little fund analyst war today but the most capable of flying through this with actual production, real money and real progress.
I see no reason not to take good advantage of this dip.

Good luck to all holders.

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GXY Price at posting: $3.47 Sentiment: Buy Disclosure: Held
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