Ganfeng Lithium (HK: 1772) (OTCPK: GNENY) is heavily exposed to the global lithium price. As that lithium price is falling - down 40% in recent months - that creates a worry for the Ganfeng Lithium stock price itself. The more there are worries about the lithium price then the more action we're likely to see in Ganfeng. This is the likely explanation for the 5% fall in Hong Kong today. That plus the fact that HSBC analysts have advised on exactly this problem.
The problem, if there is going to be such a problem, lies in the specific design of the lithium market and Ganfeng's part in it. There are two major production chains for lithium, brines - which doesn't concern us here - and hard rock, or spodumene, production. A spodumene mine produces a 6% lithium concentrate. No mine is large enough to support the next stage of the process, creating lithium salts for battery making out of that concentrate. Equally, a processor requires the input from many mines for the processor to be of economic size. Which is what Ganfeng is, the processor.
Ganfeng Lithium from Hong Kong Stock Exchange
This leads to a complex of contracts between mines and processors. Usually, when a mine is proven, ready to be financed, a processor buys in. This provides a validation, some capital, and an “offtake contract”. The processor agrees to buy some substantial portion of the mine's output. That ensures supply to the processor, a customer to the mine. But the crucial point here is that those contracts usually have a “cap and collar” on the price to be paid. Say, just as an example, the lithium concentrate price is around $700 - as it was a few years back. The contract might say that the lowest price, the collar, will be $500, the cap to be $1,000. Just examples you understand. If the lithium price is $4,500 (more recently it has been) then the cap and collar might be $4,000 and $5,000. Maybe.
We do not know what the caps and collars are in any specific contract. But we do know that they're likely to be a spread around the lithium price at the time it was signed. Note what this means. For contracts signed at a low price then the processor - Ganfeng - benefits from a significant price rise. The miner gets the first portion of the price rise until that cap intervenes, then the excess goes to Ganfeng. But the opposite happens the other way around. A falling price first hits the miner, until the collar is reached, then price risk devolves onto the processor - Ganfeng.
All of this is standard contract structure in the spodumene lithium business. We don't know the details of contracts that have been signed in the last few years - although many have been. So, we don't know the trigger points at which price risk devolves onto Ganfeng. We just have this vague and uncomfortable feeling that really large price drops would put that risk onto Ganfeng. Thus, as the lithium price comes off its bubble top the uneasiness about Ganfeng's long term position.
We don't know, but we would like to know, what are the terms and prices at which Ganfeng signed its lithium 6% concentrate contracts?