Pilbara Minerals’ Pilgangoora operation, already sizeable, is about to be ‘McMansioned’ into Australia’s biggest lithium producer by FY26f. The company is a simple exposure to spodumene concentrate with high-returning expansion plans, but little in the way of downstream chemical conversion ability.
The Pilbara region in Western Australia is not just about iron ore. PLS’s Pilgangoora operation is 120km from Port Hedland consisting of two processing plants producing spodumene concentrate. The restarted Ngungaju plant is being brought back to nameplate capacity of 180-200ktpa in 1H23f while the Pilgan plant is being expanded to produce over 800ktpa of concentrate. The combined assets have unlocked scale advantages that should lower unit cost of production over time. Future expansion could also be possible with further resource definition and supportive prices.
The final investment decision was made during the June 2022 quarter to increase the Pilgangoora Project’s production capacity from ~580ktpa to 680ktpa of spodumene concentrate at a cost of $103 million. A new crushing and ore sorting facility is part of the expansion and will support future expansions to ~1,000ktpa (FID possibly by Dec 22) at a combined capital estimate of $194 million. FY22 production reached 377,902dmt which was at the upper end of guidance of 340-380dmt. The benchmark spodumene price (SC6.0 CIF China) reached US$4,267/dmt during the quarter which translated to an average realised price of US$3,911/dmt for PLS when adjusting for actual lithia (Li2O) content of 5.4%. PLS managed to sell a 5,000dmt cargo by auction after the quarter end for a price of US$6,350/dmt (equivalent to a benchmark price of US$7,017/dmt). Current demand dynamics suggest the September quarter prices will remain high.
Tightness in the spodumene market is expected to ease as additional supply reaches the market through late 2022 and into 2023. This includes extra supply from PLS itself. Even so, PLS’s rising production is benefitting handsomely from the current environment and could generate $1.1 billion of free cashflow in FY23f. If spot spodumene prices persist above US$5,000/dmt, the earnings risk is clearly on the upside.
Sticking with its spodumene expansion might be the best growth option for PLS rather than pursuing downstream ventures such as the Gwangyang JV with POSCO to build a 43ktpa lithium hydroxide plant in South Korea. PLS has an 18% stake (option to 30%) with first production expected in FY24f with total capex of A$1.4 billion (100% basis). This project looks to have a much lower investment return than the chunky returns likely from expanding Pilgangoora.
Investment view
The ramp up of the Pilgangoora debottlenecking is timely as spodumene prices keep tracking upwards. We expect PLS to provide a beefy production guidance for FY23f when it releases its FY22 result in August (est 24th). The current Pilgan expansion project delivers an extra 100kdmt. The subsequent step up to 1,00kdmt is due for FID by the end of 2022 and this could be achieving full production by mid-2025. The EV market (auto manufacturers) is scrambling to secure supplies of lithium to feed the expected rapid rise of EV adoption across the world in the next decade and beyond. Manufacturers are committing extraordinary amounts to EV production such as the Ford Motor Company’s large increase of its global EV investment to US$50 billion through to 2026. The Chinese EV market leads the world with annual production shooting through 4 million vehicles recently. Chinese EV manufacturer, BYD (Warren Buffet’s Berkshire Hathaway is an investor) tripled its June sales and sells more EV’s than Tesla. Honda Motor Co. recently announced it will spend US$40 billion over the next decade to develop EVs. PLS is trading at a discount to global and domestic peers based on multiples of EBITDA. This may reflect some caution over the expansion projects and the company’s ability to execute. If spodumene prices remain elevated for an extended period, PLS would benefit strongly, but this cannot be confidently predicted given the new supply that is approaching the market.
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 initiate our coverage of PLS with a Buy recommendation.
FIGURE 1: CONSENSUS EARNINGS FORECASTS
FIGURE 2: CONSENSUS FINANCIAL FORECASTS
.png)
.png)
.png)
.png)
