It’s the sector that worries, not the company
Or perhaps it’s the sector that worries me about Ganfeng Lithium (OTCPK:GNENY, OTCPK:GNENF) more than it’s anything that the company has done. But then perhaps that’s not even quite right. What worries is what Ganfeng has done as a result of their view and mine of the sector differing. Perhaps that’s better.
Ganfeng’s strategy is driven by the insistence that the lithium market is getting much, much, larger. That demand will be well ahead of supply for decades and therefore the price will hold up. I agree that the market is going to be larger. I agree demand will be high – it’s just I think supply is very much more elastic than most are assuming.
This isn’t something I can prove, I can only wave hands at examples of other metals where this has been true. Fortunately, my base argument is supported by those other stories. Essentially, the world’s a big place, there’re lots of minerals in it, we’re just not short of any of them. We’re only, and at any time, short of people extracting them.
One example is cobalt
Sure, and we all know that cobalt’s essentially for certain battery chemistries. The world is going to use many more batteries. So, cobalt’s really hot right now, yes? Well, actually, no, it isn’t. The cobalt price is below the production cost of cobalt. Jervois Global just stopped development of the Idaho cobalt project on these very grounds. A primary cobalt mine will lose money. The bigger it is, the more it produces, the more it will lose.
With cobalt this is exacerbated by the manner in which it is often a byproduct of copper and or nickel mining. You don’t stop mining just because the cobalt price falls. Or, another way to say much the same thing, since you’re already mining the cobalt is still profitable even as it makes a loss. That is, you’re not covering the al in cost of the cobalt production but you are more than covering the marginal cost of it. Cobalt, like many other byproduct metals, can remain below the all in production cost for years, decades.
Another example is rare earths
I’ve mentioned this often enough around here. In 2010 China decided to limit rare earth exports, price soared. At one point there were – according to Jack Lifton – 420 rare earth projects looking for finance. Only two of any great size actually opened, Lynas and Molycorp. 5 years later rare earth prices were back below that 2010 starting point. Yes, rare earth demand went up but supply went up even more.
I very strongly suspect that’s about to happen again in fact. I’ve written before here about ionic clays. As a result of some other work I’m doing I’ve seen 6 new announcements of such ionic clay finds in Australia alone (not that I’d recommend these companies, they’re tiny, but OD6, Australian Rare Earths, Larvotto and so on). Seriously, 6 new finds in two weeks – rare earths just aren’t in short supply. It’s current producers of them that are.
My contention is that supply can and will expand
The world is large enough that there’s plenty of every mineral out there. The shortage is only in extant producers. As we can make a producer by adding effort and capital to various piles of rock then in the long term we simply don’t have shortages of anything.
Further, the way that markets and capitalism work we near always (well I’d say always but that’s me being opinionated) end up with supply running ahead of demand. So, prices collapse.
This means that I think the lithium price is going to decline. Sure, it might well remain elevated for a year or four – about the development cycle of getting a mine into production in a sensible jurisdiction. There are many such projects in varied phases too. We’re also seeing distinct advances in alternative sources beyond the traditional spodumene and brines. Things like Zinnwald extracting from mica, Vulcan in Germany and all that work at the Salton Sea on geothermal waters.
Beyond that there are the truly inventive claims – there’s one that the Red Sea itself is a viable and economic lithium source. I’d need to see much more data before I believed that one but. My point does, I think, hold up. Which is that there’s no long term shortage of lithium. There’s just a shortage of people currently producing it.
We can also check this from another direction. The Tesla Master Plan 3 says that electrifying the entire world would require only 20% of all lithium mineral resources. Note something here. Mineral resources are not all lithium. It’s all identified lithium of the mineral types we already know how to process. Mineral resources are, pretty much by their definition, what we are really pretty certain we can extract by just adding more effort and capital.
So, if we only need 20% of all of those to electrify the world then we’re short only of production, not of the ores and minerals that can be produced from.
Therefore prices are going to fall to something close to the average economy wide profit level over production costs. Or as can happen often enough, to below that for some time. This though is a prediction from economic logic and while that’s useful the real world is often a bit more complex. Most importantly, we’ve no idea when this is going to happen even if we’d (I would at least) happily stand by the claim if we were able to say, “sometime in the next five decades”.
The Ganfeng price is already down
Now Ganfeng is a dominant firm in the industry. Try here for some details. But the lithium price is already well down from recent peaks. About 50% off all-time highs in fact. Sure, we could say this is all short term influences on the spot price. Many do and even I’ll admit that some of it is indeed that.
My claim is that this is not just a short term movement though. We’re getting sufficient investment in new production to not just meet but exceed future demand. That price is going to be much – and I’d say much, much – lower in 3 to 5 years than it is now.
And that is the Ganfeng problem for me
If we look at Ganfeng’s own presentation then we see that they’re very proud of the way that they’re investing heavily in production. Not just their original main business of processing, but in the mining. Bacanora, Mariana, Mount Marion and so on. That huge expansion up toward the top of the production chain had all been done when lithium prices were at their peak.
And that’s what worries me. Buying assets at the peak of the price cycle is something that becomes a large problem at the bottom of that same price cycle.
Assuming that the price does follow that cyclical pattern that is. I think it will – because I’m insistent, along with Tesla, that there’s no actual shortage of lithium, only one of current producers.
It’s really very simple. I agree entirely that lithium demand is going to be high. But I insist that lithium supply is going to be higher. Therefore the lithium price will come down. That will not be a happy time for lithium producers who have been buying up assets at the top of the market.
Therefore I’m bearish on Ganfeng. Not enough to recommend a short simply because I almost never do so recommend. But I’m not bull.
Why I could be wrong
Well, obviously, that base analysis could be wrong. Perhaps not enough lithium supply does come to market and therefore prices stay elevated. At which point all of the above is wrong.
The investor view
The real point here is I think that the big excitement in lithium as a sector is over. It’s already happened. There will be certain assets that rise in value as they open simply because value does increase as a mine gets derisked from an exploration adventure into a producing asset. But the sector as a whole, and thus dominant companies in it like Ganfeng, no, I think the bull run has already happened. I expect gentle decline from here on in.
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