Cash mountain or capex volcano?

4Q23 PRODUCTION

Need To Know

• PLS has $3.3bn cash.
• P680 and P1000 expansion projects will consume plenty of that cash.
• The market is too optimistic on spodumene pricing, in our view.

Investment Implications

Pilbara Minerals is sitting on net cash of about $3.3bn after the company produced 620kt of spodumene concentrate in FY23 at the top end of guidance. Additional sales of inventories more than offset the -33% price decline in 4Q23 compared to 3Q23.

4Q23 production was commercially very good for PLS despite the savage fall in spodumene prices. This is the price hangover the market has been expecting after the hysterical increases enjoyed through the last 12 months. The market is reluctant to give back all the price gains and forecasts remain quite variable in both short and long term scenarios.

The P680 expansion project has seen some slippage in timing with commissioning of the new crushing and ore sorting facility now expected in 4Q24 (was 2Q24) and ramp-up during 1Q25 (was 4Q24). The difference is small but a timely reminder of the project risk that exists. Early work on the P1000 project has begun with first ore targeted for 3Q25. Both projects will consume capex of $404m and $560m respectively and are both internally funded. P680 capex was substantially increased earlier this year due to rising cost of materials and labour. The downstream JV with Korean giant POSCO to produce 43ktpa lithium hydroxide is progressing. Train 1 (21.5ktpa) is 35% complete and on schedule to commence production in 3Q24. Train 2 (21.5ktpa) is 65% complete with commissioning due in 2Q24.

PLS is chasing new customers to soak up the extra production that P1000 will create. This could include partnering to convert the spodumene into a variety of lithium chemical products such as battery materials. This diversification is a long term strategy.

Investment View

Consensus forecasts are already factoring in a spodumene concentrate price of US$3,300/t for PLS in FY24 after the company achieved an FY23 average price of US$4,449/t (US$3,256/t in 4Q23). With the slippage in P680 timetable, production forecasts in FY24 might also be too optimistic.

PLS must undoubtedly be pleased with how it has filled the cash bucket while prices were frankly silly, but it may wish to conserve some of it as cost pressures stick around and capex budgets get adjusted, as we have already seen.

Falling spodumene prices will eventually weigh on the share price, hence we retain our Hold recommendation.