Hey folks,
I'm guessing most AGY'ers are across or invested in other ASX lithium plays so thought it would be worthwhile sharing my thoughts and generating some discussion around the current state of play and how this fits into AGY's strategy &
COMPETITIVE ADVANTAGE.
Firstly, it is becoming ever more apparent that Aussie hardrock/SC producers are under serious pressure.
Recent qrtly announcements from the likes of PLS, A40, AJM and GXY paint a pretty grim short-term picture for SC producers. The main consensus is this is being driven by the bottleneck in Chinese conversion capacity that has seen SC pricing/profit margins dwindle as customers continue to push back on delivery timeframes. This scenario shouldn't come as a surprise to anyone given the Chinese converters make up 100% of their customer base and are essentially able to dictate terms to the market.
AJM and A40 have both recently raised capital to allow them to stay afloat.. If PLS can't find a buyer for the 30-49% stake they are looking to offload I would suggest a pretty decent raise is on the cards. Keep in mind GXY dropped $20m for a ~12% stake in A40 a few months back and have seen the value of that investment already drop by 50%
Pretty sure I know how they could have doubled that $20m within 6-12mths, but more on that later.
It would be naive to think these challenges have come as a shock to most... The signs were there some time ago and it appears the Mgt of these companies have been blindsided by the obvious. Essentially they have put all their eggs in one 'Chinese' wicker basket, and only now beginning to realise the headwinds are getting stronger. Fair enough they didn't have much choice given the head start and monopoly Chinese lithium chemical producers have over the market. It is quite pertinent to see that only now these SC producers are looking at downstream conversion joint ventures to wrestle back some control of their future destiny.
I've harped on about this for sometime, but it is becoming increasingly obvious that for the future success of Aussie hard rock operations, they desperately need an Australia-owned and operated downstream processing facility built in WA or atleast a stake in a O/S converter - albeit latter much riskier & didn't work out well for GXY in the past.
If I was WES, this is where I would be focussing my attention and capital, SC producers are crying out for an alternative customer to the Chinese and given the forecast growth in non-chinese cathode manufacturing, the market will lap up any future direct supply of lithium chemicals that the Chinese don't have control over.
IMO, PLS have created a shorter's paradise by publicising that they are looking to offload a stake in their tier 1 hardrock project. It is not hard to imagine many of big players are licking their lips at this opportunity and I suspect using their own capital to put pressure on the SP so that they pick up the best deal possible. In hindsight, PLS Mgt should have kept their cards much closer to their chest, pushed for a deal with a POSCO given they are already proposing a future conversion JV partnership. As we have seen previously, POSCO have deep pockets and are happy to pay top dollar for a decent slice of a tier-1 asset.
It is going to be a real uphill battle for any new oz hard rock projects that is looking to get development funding in the short to medium term.... The numbers are just too thin with current SC pricing and when it is quite evident China like to play the long game, I suspect they will continue to strangle this market for the foreseeable future in the hope of picking up a few bargains along the way.
Given the headwinds over the past 12-mths and especially the challenges in the hard rock space, it is hard to fathom that GXY have been sitting on a tier 1 brine resource for nearly half a decade. SdV came gift-wrapped with a JORC/NI43-101 resource that was good for 20+years @ 20ktpa yet they have continued to twiddle their thumbs, lacking direction or a development strategy and focussing on drilling out the resource further.
Fair enough, the upside in this approach has allowed them to offload the northern tenements to POSCO for a handy sum which has inturn, provides them with a decent headstart on capital required to get the project up and going... If I was a shareholder of GXY I would be very concerned that they are looking into various processing techniques (incl. commercially unproven/'blackbox' methods) as I get the feeling they lack the technical team to deliver the project. Previous presentations a few years back had Vijay Mehta (co-author of FMC patent with PA) as one of their head technical guys but his name hasn't been mentioned for quite some time which indicates he is no longer onboard
SO what does this all mean in relation to AGY ???
Basically it comes done to Competitive Advantage.... when your (future) peers are all driving down the same road it takes balls to say hang on, is there another way which might take a bit longer but has far more upside in the long-term.
Serious credit needs to be given to JZ who had the foresight to not follow the obvious path and see that despite the technical challenges lithium brine production presents (vs hardrock/SC), the advantage of producing a 'bag to battery/cathode' product and the subsequent direct access to end-users and cathode manufacturers makes a lot more sense and provides far greater control of your destiny.
AGY is mostly immune to the current headwinds and challenges other ASX SC producers are experiencing in the hardrock conversion side of the market... The future is very much uncertain within the SC channel that is currently at the mercy of Chinese converters.
Given this challenging dynamics of the hardrock/SC market channel, I am really struggling to understand why GXY invested $20m for a 12% stake in A40 recently... It has been mentioned that it might be the first step in the future TO of A40 and given the 'strategic review' they announced y'day, A40 Mgt might be looking to offload and set off into the sunset.
So I was thinking out aloud earlier and thought given brine (BG) is a far more attractive proposition in the current market, and GXY's 'questionable' technical capabilities to execute on a brine project, that $20m would have been far better utilised taking a stake in AGY to fund the initial 2000tpa module plant.
Subsequently, there would be the opportunity for synergies within the group, opening the door for PA and his tech team to assist, advise and help develop their SdV project (with AGY/Puna negotiating a royalty fee of course).
IF, GXY had put up the $20m in AGY @ 10c, I dare say they would be well on their way to doubling their investment by now or coming months with permits due shortly. They then could of picked up the same 12% of A40 for half the price ??
Anyway, the upside is AGY are in a unique position that can't be replicated very easily. They have the proven technical capabilities to produce battery grade carbonate or hydroxide that allows them the luxury of their final product going directly to end-users and avoiding the pitfalls of the conversions market.
Only one other ASX Co can lay claim to that at the present and they are doing a pretty ordinary job of it with only 20% of total production being 'purified' product that according to a number sources, still needs further refining before making its way into a cathode.
Bag to Cathode is where AGY is positioning itself and IMO this is the space that presents the most upside.
(20min delay)