A couple of years ago, during one of the various "expert" information sessions I read or attended the point was made by the expert that spod was not easily interchangeable. A converter is set up to handle the spod from a specific geology, so you can't just replace the feed with spod from another mine without an overhead. Sometimes - like oil - multiple spod sources can be blended and then used (if the chemical makeup is similar), but in any case a converter likes to have a committed long term supply from a known source so they can optimise the plant to a known chemical makeup. This was the primary logic for long term multi-year offtake agreements, it also meant that their was a limit to the pricing falls, as the converter had little interest in the product source failing after a year or two. I think it was that same session that first alerted me to the fact that it was not the % of Li in the spod that mattered as much as the impurities. Pulling Fe out of the spod (for example) so it didn't taint the final output was more of an issue than processing an extra % of rock so what mattered most was the chemistry of the spod, and the % less so. It just so happened that lowered % spod usually had more troublesome impurities - but not always.
I guess spods ain't spods.
Now when these current "experts" talk about marginal or non marginal producers, they seem to think in terms of 0.1 to 0.4% range of Li in the spod and the processing cost to produce. GXY lifting % to 5.9 will address the first, but the big issue they don't seem to get, I guess because they don't have a financial brain cell between them, is that the way the mine is financed - eg debt versus equity is a HUGE issue that can transform a low cost producer on straight unit variable costs into a high cost producer. So when you look at the financing component of GXY - it is $0 (because - no debt), when you look at some of the other current producers in Oz making 6% spod (but discarding up to 50% of the content to do it) you find the financing component even now is turning them from profitable to extremely marginal, if not a loss. That means GXY's all inclusive production price is not a lot different from its production cost (excluding depreciation), but for others the all inclusive cost is a lot different. The ll inclusive cost is a number that includes all costs of productin and overhead allocation rather than just the unit variable costs.
The "marginal producer" comment based only on the unit cost is specious at best, particularly when it is based on the highest cost quarter, rather than the current cost, and even more so when the costing does not include the full transport, insurance and particularly financing cost.
The other point to capture is that the mine life is a huge issue on the other part of production costs not usually considered in these producer comparisons. The amortisation/depreciation component. The EBITDA figure quoted everywhere excludes Interest, Depreciation and Amortisation. Interest I just covered in the financing costs bit above - this favoured GXY as it has 0 interest, but severely weakens some of the other new spod producers. Depreciation and Amortisation was GXY's weakness with a 7 year mine until recently compared to other new and upcoming producers with 10 year plus mines. This matters because if I spend 200m on a plant at a 10 year mine I might charge say 20m / yr in depreciating the plant over the ten years, but the 7 year guy has to recognise 28m / yr. So GXY was more marginal on this front than another mine because of its shorter mine life, BUT, late last year GXY released the latest numbers from its ongoing drilling/exploration program around the mine which increased the reserves by 40% - thus bumping up the mine life to 10 or more years (I think), and potentially more when more exploration / drilling is done on the yet to be tested areas. So the mine life extension should translate to an average 8m (or so) reduction in all inclusive costs - thus making it less marginal than it was say middle of last year. (Note also that the LPD tech offers to potentially extend this further or massively increase (ie. almost double) the rate of Li production from the currently discarded tailings).
Now, it is not quite this simple, because companies do not tend to use the straight line depreciation calculation implied in my figures any more but, for tax reasons and asset degradation reasons, tend to use "reducing balance" as the depreciation calculation which loads up the early years with higher depreciation charges than the later years, so in the early stages every miner will have higher depreciation charges than the average straight line charge over the life of an asset - which is also the reason for looking at the EBITDA (earnings before dep, int and amort) numbers instead of just the net profit which is earnings after these charges. However, in either case extending the mine life by 40% has a significant impact on depreciation each year, because it extends the period over which you recover the investment in plant - whether on an average charge basis or a reducing balance basis.
Every time some geologists decides to pretend to be an accountant, you need to take this lack of training in financial modelling and accounting into consideration. Whether a project is marginal or not depends on a lot more than just the unit costs of processing throughput and must include the costs of getting the product to the consumer, the cost of the project financing and the investment in plant versus lifetime of recovery of those costs as well as the price my customer will pay, which depends in part on how expensive my product is for him to use to make his product (against what he can charge for his product). If my product is more expensive to make than my heighbour's, but cheaper to process to the next stage, then I am not necessarily more marginal than him because I can charge more for it. Measuring marginality is complex - not impossibly so, but a bit more than a throw away line will capture.
Having said that, you can get an accurate picture of the marginal costs of production for a Li mine within the first couple of years of production becuase the ramp up and tuning stage takes that long, during which costs will be shifting continually - as we have seen. Averaging them over a few years might work, but the first year or so is not likely to be enough. Better to just look at the free cash flow - is it positive or negative. GXY makes this assessment even harder (or easier to misrepresent) because their overhead costs as a firm include the costs of developing two additional mines, so corporate overheads alone are significantly higher than if they were just running one producing asset.
This is one reason why GXY were foolish to race into presenting themselves as a producer only rather than as a developer - as 2/3 of their mines are actually in development rather than production in other words 2/3 of their operations are like KDR and only 1/3 like Greenbushes. Well not even 1/3 really because they are only just coming out of the ramp-up stage.
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