Just got back from a very interesting lunch with Anthony Tse.
He flew in last night to wave off the shipment at Esperance
which is now due to start loading tomorrow, and he dropped me a note to ask if I wanted to have lunch and a chat.
Took about 2 seconds to say "no worries".
I'm not quite sure why I am the conduit for all this access to the boss but it was a great lunch at Matilda Bay watching the boats bob around on a perfectly calm day on the Swan River with just a bit of light breeze through the open windows.
Anthony is a very likeable guy. He smiles easily and has a great way of explaining things.
Plenty of times all the glasses on the table were deployed to represent different companies or countries and he has a wicked grin when he wants to illustrate just how ridiculous or implausible a particular company's plan actually has become.
We got on just fine and were there for 4 hours talking. It was another great chance for me to mine some of his deep overview of the sector. I wasn't expecting a price sensitive insider scoop, nor did I pursue one. This chat wasn't considered "off the record" and focused mostly on the lithium sector, part history and part geo-political struggle to get this revolution moving at a sustainable pace.
We started back with Greenbushes and Tianqi's take over, how it was financed, how Rockwood became involved and then Albemarle. Went through a lot about how Albemarle have been left in a strange position with GB offtake, but unable to process the spodumene.
Then onto the Converter Squeeze, Joe Lowry ("he tells it like it is"), Mt Marion, Ganfeng, the Australian junior sector, likely brine deposits, Shandong Ruifu, GLC, Telsa, BYD and many more all came up as subjects.
I'll bust out a few as point forms while I still remember them.
Over supply :
Anthony is a pragmatist. He answers these analysts on the phone by saying "Go ahead. Write it the way you see it. But answer me this : If you keep publishing over-supply analysis - what happens to the billions of dollars of investment cheques needed to open these new projects? That's right. They don't get written. The projects that need them come on later or not at all. Then what happens to the over-supply? Then what happens to Galaxy's profit margins?"
Australian Juniors :
One of the little know facts that Anthony talked about was the Mining License. Seems WA is one of the stricter places to get one of these. Galaxy's license took 2 years. 24 months is standard.
With the exception of Ganfeng's Mt Marion, he didn't consider any of the current crop of ASX lithium juniors as "competitors". He said that perhaps because he was closer to the Chinese businesses that he heard more about the Australian companies from them, rather than talking to companies here "at the club". Chinese companies were cautious about the state of Australian companies. Seems they also regularly ask his opinion of them. They have learnt a few tough lessons from bad investments and money is now much harder to get out of them for early stage development. One notable company has made a lot of noise, but have messed up a lot of their own BOAs by trying to do deals with too many different parties - this resulted in offending them in the process. There is the sense they will wait and see and in some cases are doing handshake deals with little intention of following through. Some are puffing themselves up for a local audience as they embark on becoming listed companies.
The one thing the Chinese asked was whether a company was "a builder, or a flipper". They aren't interested in being flipped, obviously.
About one of them, the Chinese asked what did the boss do before. The answer "Atlas" didn't make them happy....
When AT meets the bosses of the Australian juniors he said he ignores their boasts of their future profitability and is supportive and says "Go ahead. Build it then". Then he smiles.
Mt Marion:
Anthony knows the Ganfeng boss well and says he congratulates him every time he sees him for the lop-sided way they've managed to swing the equity stake. There was frustration about the lack of information and production progress. The delayed shipment has some BS quality about it. Booking ships is not difficult. Weather was a problem from the winter etc.
Pricing for NMT will eventually surface, possibly in a 2-tiered structure for their 6% and 4% grades. Mica impurities has been ignored for the moment as the project has decided to push on for quantity over quality - the reverse of Mt Cattlin's ethos.
Mt Cattlin has decided to adopt the Greenbushes standard - a product that has an easy spec for the converters to handle, making it easy to chop and change the eventual clients without much fuss.
Take Overs :
Of course, I didn't ask specifically if Galaxy was about to be taken over. He would never have told me anyway.
Importantly, he didn't see any near-term urgency on the part of the Chinese to take over non-production assets.
I can't remember the exact term that Anthony used - but he presented Galaxy as a company that was more likely to be the one that will be doing the taking over. The cash-flow immediately catapults Galaxy into a more profitable operation than Orocobre, without the same scale of debt. This cash flow has given some breathing room for Galaxy's position as independent supplier. Tianqi etc were not expecting Mt Marion and Mt Cattlin to get up and running as quickly and it's caught them a little by surprise.
Fast Brine and Alternate Hard Rock Processing :
AT "If it's so good why haven't the majors invested in any of these processes?"
Same as we've been saying here for a while.
Anthony said he was fine with innovation but these processes need to be proven with full-scale operations. None of the majors are willing to risk the capital and the old addage "If something ain't broke, don't fix it" came up.
If something did prove itself then he was sure the industry (and Galaxy) would just incorporate it - but the responsibility, investment and risk would have to come from those developing the tech.
Defensive Brine :
I perceived Galaxy's strategy was the same as outlined in both his little interview with me and the latest presentation. Sal de Vida and James Bay with processor are both on the table and likely to be developed concurrently. Each of them offers a diversified strategy. Sal de Vida enters with low cost product that is widely recognised as the world's best undeveloped brine resource and James Bay with a processor would open up standalone production and a new client base in North America and/or Europe.
Financing these projects in the best way possible and with the best partner possible is the focus of his work right now.
Brine production is always going to win the cost war, simply because, in comparison to hard-rock operations, there are a dozen or so expensive steps that it skips to create a finished product. On the negative side of the ledger was that it took time to do it properly. He liked SQM's operations, even though the political climate of Chile was a little unstable.
We talked about Argentina for quite a while. The difference in the different provinces Jujuy, Salta and Catamarca. He compared Argentina to China, as a country that has very different regions - some incredibly westernised and modern and some communities living a completely traditional lifestyle. It was following the same path to social and economic improvement, with the government sweeping away entrenched regional inequities and corruption, modernising infrastructure and legislation. He made the comment that both SQM and Albemarle were finding Chile difficult to work with and were expanding their brine bets with new operations in Argentina instead.
He illustrated the problems with starting a brine operation for micro-caps that may need to find tens of millions of dollars just to get to DFS stage. He wasn't picking winners in the micro-cap brine plays. Even LAC he suggested were in a difficult position, after SQM 50/50 deal left them still having to find capital the size of their market cap.
Apparently Tesla have already been in touch but were asking for cost price production. That didn't go down well. Tesla is only a small (but highly visible) part of the market. Nothing about producing for them without profit would benefit Galaxy share holders.
In the end, he saw that hard rock has a window now of 3-5 years where it would be important to lithium supply. After this, however brine was going to have insurmountable cost advantage. There were dangers for late entrants into hard rock, particularly if they were too heavily laden with debt. He did not realistically expect many Australian entrants until 2019.
Lithium Demand and Risk :
Anthony colourfully described that lithium was on a massive upward demand trajectory and one could only be put at risk "if the Chinese said f*** it" - that they were willing to abandon their plan to decarbonise and replace oil in their economy. Likelihood:very low. He painted the picture of the young 20 something in China now faced with the choice of buying a car. ICE cars are now heavily taxed and red-taped, and their usage limited - versus an EV that can be used anywhere and anytime and benefit from govt subsidies. Charging networks have been boosted and have become common place due to the number of EV bikes.
He also talked about the geo-political risks that China was trying to mitigate. Aside from the very real dangers of their pollution levels, they were at risk of an economy wide stand-still if oil supplies were cut off, and there was a real need to become independent on the USD-dollar driven oil economy.
Anthony was keen to see lithium becoming more globalised. It was important that battery production didn't become a Chinese monopoly and that viable Japanese, European, Korean, North American and South American production was established. As far as supply side he saw room for every body that was promising supply to come online. Of those projects, many were destined to fail from lack of finance and experience. Investment for these publicised projects is still a couple of billion short.
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Anyways. That's all I can remember right now. The food was excellent and I thanked him on behalf of share-holders for his spectacular success this year.
Anthony wanted to thank all the Hot Copper investors for their support this year and wished us all a fantastic 2017.
He said he found HC one of the most vocal and activist online investor communities and was appreciative of all the energy we put into our discussion and the research that we do. He even said he'd score my own lithium research about 60-70%
- compared to some professional analysts at 20-50%...
Anthony was massively positive about 2017, expecting that this coming year is when we put a fair amount of space between us and the speculative sector.
Happy New Year to all holders.
Cheers
AC
