The decision to expand the Pilgangoora project to 1mtpa has been made in quick time and reaffirms it as a world class tier-1 hard rock lithium project with a 25-year mine life. A payback period of less than one year, according to the company, indicates the strong interest from downstream offtake potential partners.
P1000 Project FID. PLS has taken its final investment decision (FID) to expand the Pilgangoora project to 1mtpa for capex of $560m with full production due by the September quarter of 2025. This follows hot on the heels of the P680 project which is on time to deliver an additional 100ktpa of concentrate by December 2023 at a capital cost of $404m. P1000 will be executed in parallel with P680 and has a forecast payback from incremental cashflows relative to P680 within 12 months. This is based on benchmark lithium chemicals and spodumene concentrate pricing linked forecasts and an exchange rate of AUD 74c for FY25.
Additional infrastructure and power supply is required for the expansion. The Port Hedland (Lumsden Point) facilities will also need to be expanded once P1000 reaches full capacity. The Pilgangoora mine is just 120km from Port Hedland. The Pilgan Plant annual throughput will reach 4.92mtpa with the concentrate grade design range between 5.2-6.0% Li2O providing flexibility to tailor product to maximise value and meet customer needs.
PLS will fund the P1000 project from existing cashflows and its own balance sheet which reported a net cash position of $2.1bn as at 31 December 2022.
Investment View
The P680 project saw a substantial increase in capex from $297m to $404m, mainly due to higher cost of materials and labour. The P1000 estimated cost of $560m could also be subject to rising costs which may change the economics of the project.
Despite this risk, the PLS Board is exuding confidence in the expansion based on the intensity of interest for offtake agreements both with existing customers and potential new ones.
PLS is currently a pure spodumene concentrate producer and it could investigate downstream JVs on the back of its increasing production. The company does already have a JV with POSCO for a 43ktpa LiOH chemical facility in South Korea under construction. Commissioning of the first train (21.5ktpa) is due in late 2023 with the second train commissioning following in the March quarter of 2024.
Commodity prices for spodumene concentrate and lithium chemicals have been receding from recent high levels but are still attractive. Longer term sustainable pricing forecasts for spodumene concentrate are broadly US$1,000-1,500/t. The question for investors is how quickly pricing may reach these anticipated levels or conversely, how elongated will the decline be given the anticipated demand for battery grade lithium for use in EVs?
Consensus earnings forecasts for PLS over FY23-25f have increased by more than 40% since the company reported its FY22 result in August last year. However, there is a wide dispersion of forecasts for the outer years primarily due to uncertainty over future spodumene concentrate prices.
PLS now also has some dividend yield appeal. After declaring a maiden 11cps interim dividend in February, PLS is targeting a payout of 20-30% of free cashflow. The company has commenced making tax payments from February 2023 and will accumulate franking credits in due course.
PLS is due to report its March quarterly production result on 27 April.
Risks to Investment View
Construction and commissioning issues for the growth projects are the key near term risks. Cost increases and inflation may impact project capex. 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 Hold recommendation.
