Results overview:
Underlying EBITDA $3,317m in-line
Average realised spodumene concentrate price US$4,447/dmt (FY22 US$2,382/t)
Spodumene concentrate production 620kt (FY22 378kt)
Final dividend 14cps fully franked
FY23 result. An extraordinary year for PLS in terms of the cash and earnings generated by the combination of higher production and elevated commodity prices. Gravity has taken over and prices are finding a level below US$3,000/t and likely heading gradually towards US$2,000/t. in our view. The offsetting factor for PLS is the long term stepped expansion of the Pilgangoora project towards 1mtpa of spodumene concentrate. The P680 step (cost $440m) will ramp up in 4Q24. The subsequent P1000 step (cost $560m) has first ore targeted for 3Q25.
PLS upgraded its Ore Reserves by 35% to 214mt triggering a new study for potential expansion beyond 1mtpa. The upgrade makes Pilgangoora the largest hard rock lithium resource in the world ahead of the Greenbushes (IGO) and Wodgina (MIN) resources, both in Australia. PLS does want to diversify from Pilgangoora, so future capital decisions will be made in that context.
Outlook. Production guidance for FY24 between 660-690kt of spodumene concentrate (grade ~5.2%) with unit operating costs $600-670/dmt. Capex will be $490-540m on the P680 and P1000 growth projects, mine development $140-160m, sustaining capital $75-85m and other projects $170-190m. The latter category looks like a slush bucket of poorly explained intent. The company faces an extended period of waste stripping to accommodate the growth projects (and beyond).
Cash tax is expected to be around $1.3bn in FY24.
PLS will update its capital management returns strategy in the next few months. Out-of-cycle special dividends and/or buybacks are possible.
Investment View
The giant bucket of cash that FY23 threw up is unlikely to repeat anytime soon. Commodity pricing has eased, and capex is rising at PLS as it chases 1mtpa production and beyond. PLS is also considering downstream JVs complementing its existing LiOH JV with POSCO under construction.
The spodumene price is fundamental to the downstream lithium chemicals industry that is central to the battery manufacturing industry and other energy storage systems. The growth in demand for the end products appears immense, but the timeline and pathway is packed with uncertainty. Will technology shift away from lithium? Will the exuberant demand growth for EVs take longer to manifest or even fall short? Will government subsidies and regulations change the investment appeal of some projects? None of this is in PLS’s control so investors will be hoping it is not a one-hit wonder.
At a FY24 PER of 8.5x, PLS is not exactly priced like a growth stock suggesting that consensus forecasts are building in modest expectations in the next two years. We think this is sensible and retain our Hold recommendation based on this outlook.
Risks to Investment View
Construction and commissioning issues for the growth projects are the key near tem risks. Cost increases and inflation may impact project capex. Spodumene concentrate prices may not be sustained at current levels 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.
