Hi Marty. Good question.
There is probably no need to go into much detail to have a go at answering this.
But I'll try.
Galaxy already has it's clients and contracts. We are now bedded down into those graphs of supply and demand that are posted. Our clients have nobody else to turn to at the moment.
Or for a good while yet.
They survive on our supply and some tolling arrangement from Albemarle, where they get paid in spodumene, which they then sell for profit.
Our clients, the independent Chinese converters, numbering about a dozen (with a couple of new entrants building now), have no other suppliers in the realistic future - the next 12-18 months.
You could draw that out longer too - to as far as 2019 before any decent amounts of hard rock supply come online, even if building on some of these projects begins soon.
This is the rationale behind our recent price increase to $905USD/t. We have 120kt spoken for in 2017. This means when it is complete there will still be no other companies ready with product - and we will have a further contract. I'd predict that we could reasonably expect even higher pricing then. Greenbushes supply has been trending lower and there is even less for them to get with the Albemarle tolling deal.
All forward projections of profitability with Galaxy (from the company) have always been based on fairly conservative pricing so, in many ways, the possibilities of an approx 20% reduction in lithium pricing has already been factored in, particularly for a project over the next horizon like SDV. Even still, the NPV for that project alone exceeds our current market cap by 50%.
Note here that most juniors are still basing all their pricing on Galaxy's current contract, and are also adamant that their costs will be unrealistically and record-breakingly low, and their time-lines super efficient etc etc.
Truth is that demand is progressing much faster than production.
Only the promises and projections by inexperienced junior challenge that model - but we can again be realistic, and it's simple to see that delays and problems will beset the vast majority of these projects - and the main hurdle will be financing.
It appears already as a thorny issue for the next wave. Getting money out of China was previously being touted as "gagging for it" - but the reality is a mix of bureaucratic hurdles and Chinese companies demanding that many more boxes are completely ticked before signing over cheques. How do you "build it and they will come" if you need them to come first to build it?
As we have seen here - even offtake arrangements with pre-payments do not guarantee that many will not be facing hefty CR's to get over the hurdle to build and then survive into shipping and satisfying their first contract.
Actually, the main hurdle to clear is simply experience. I remain unconvinced that there is much in the way of good management teams running junior lithium projects at the moment. Plans are regularly aborted, and swept under the rug, timelines ignored and legal issues rise without warning etc. But boy can they drill! They certainly know how to do that....
So when you say over-supply - where is it coming from?
Brine?
Albemarle are not on track with their predicted output now or over the next couple of years.
ORE have plant issues and are now fessing up to the mess they're in with output, quality and debt.
The new Cauchari project is due to open around the same time frame as SDV - late 2019.
POSCO, once promising the world with a new fast brine technique - have scaled down to a tiny, boutique operation. etc etc
With some form of finance of jv or finance deal to take care of SDV capex - Galaxy may even have James Bay up and running by this time, as per the stated goals of concurrent development by Anthony Tse.
At the moment - the market needs a bit more clarity as to how this will be achieved, but the signs are positive. They have a good team at SDV that can build and run a world-class operation. Q2-Q4 profits will begin stacking up and the credit raise should cover the costs of the initial $30m SDV test plant. Even that may begin adding a bit of profit within 12months or so.
James Bay could be paid for with profit from Mt Cattlin, again putting it in a competitive time line with most of the most optimistic juniors' plans. Remember - they've done this before and there is a lot of money and time to be saved in learning from one's owns mistakes.
Deutsche Bank's report from mid last year saw new hard rock projects coming on so slow that their combined output by 2019 did not even match Mt Cattlin's this year.
Over supply?
It's definitely an importantn issue for the next wave trying to raise finance and investor confidence - but for Galaxy, with money already coming in - it is a factor - but it will not stop us shipping and contracts continuing, or SDV/JB being built and ready to go when the world really hits high EV penetration and grid and home storage becomes commonplace.
And that is just economics.
Lithium (+solar/wind) wins on price of power generation already, even without Tesla/Panasonic driving the price of batteries down towards $100/kwh.
Whatever is going on right now with the technical side of our stock price - it has a lot to do with this model of future demand. 20m shares are not changing hands each day here because this company is going down the gurgler or that the world won't need our lithium.
It is an opportunistic raid to establish good positions in a company that has a good 3-5 year run ahead where it emerges as a dividend-paying blue chip.
