Lithium is in hot demand around the world. Pilbara Minerals’ FY22 result may have fallen short a little on earnings and its guidance for FY23f might be a touch light, but the market does not care for nuance at a time of exuberance.
PLS’s FY22 EBITDA of $814 million was 6% shy of consensus, mainly due to a small miss on revenue. Compounding the disappointment, FY23f production guidance was set at 540-580kdmt, and unit cost of production has been guided 8% higher to US$530-570/dmt. Capex guidance also got bumped up to allow for $130-160 million extra of waste stripping costs in addition to the P680/P1000 projects.
In the context of swiftly rising spodumene prices and increased shipments, PLS can comfortably offset the higher capex and operating costs. The increased waste stripping is a new factor that required monitoring.
The average realised selling price achieved by PLS during the year was US$2,382/dmt (CIF China basis), but the 4Q22 average price was US$3,911/dmt. Spot prices remain elevated and there is little sign of retracement.
PLS said the expected deficit in lithium by 2040 could grow to 1.8mt or as much as ~18 Pilgangooras just on a base case scenario (Source: Benchmark Mineral Intelligence 2022).
From a current installed base of 580ktpa, PLS has an expansion plan to reach 1mtpa (P1000 Project). That will be preceded by the P680 Project (cost $103m) that has been approved (FID) by the company. A crushing and ore sorting facility ($194.5m) will replace the existing contracted crushing plant at Pilgan.
The company will undertake a Reserve and Resource update in October. This has potential for a material upgrade to reserves, driven by pit optimisation and pricing assumptions. The FID for P1000 is due by December and the company will provide a capital allocation update before the end of CY22 including shareholder returns.
Investment view
The catalysts for this stock are many, ranging from reserve and production upgrades to runaway market prices for spodumene and LCE (lithium carbonate).
Keeping our feet on the ground says the share price is not especially cheap on a base case scenario, but spot earnings momentum will keep it on the boil.
There are also latent unvalued growth options at Pilgangoora, one of the few producing hard rock deposits with scale in the world.
PLS has the resource, production and capability to capitalise heavily on the huge global demand for lithium products.
Risks to investment view
The expansion projects are subject to delays and cost overruns which have typically plagued previous growth projects. Spodumene prices may not be sustained at current elevated prices which could affect future earnings. EV battery technology is evolving and may depend less on lithium than current versions.
Recommendation
We have retained our Buy recommendation.
