Gravity is beginning to take hold of runaway lithium prices. We expect this to continue throughout the first quarter of this year. Longer term supply is catching up with demand and inventories remain high. Pilbara Minerals’ expansion projects can still benefit from the elevated prices but will cost more to deliver.
In the short term, spodumene and lithium prices appear to have peaked. PLS’s most recent commentary in December 2022 said, “revised pricing outcomes with our major offtake customers represent a very positive outcome for our shareholders, reflecting the strong market for lithium raw materials supply and bringing our contracted pricing in alignment with the broader market”.
Medium to long term pricing should remain elevated and well above the (rising) marginal cost of production so that producers will continue to generate attractive earnings.
Incentivised by very high prices, new supply is rushing towards the market with growth of ~25% from brownfields projects underway, including PLS’s planned expansions There may be further supply available from additional new projects and some potential re-starts.
The demand equation is largely driven by the growth in electric vehicle manufacture, or more specifically, batteries for EVs. Technology is playing a role in the outlook as new chemistry clouds the outlook for lithium. Sodium-ion batteries, for example, do not require lithium and this technology is being pushed by China’s two largest EV manufacturers, although it is early days.
China’s huge EV market has slowed as COVID restrictions have disrupted the economy and the removal of subsidies will accentuate this. Chinese demand for Battery Electric Vehicles (BEVs) has been the main driver of demand for lithium products and this could wane in 2023 against the tough economic background.
PLS has increased the cost of its P680 expansion project to A$404m from A$297.5m due to a range of factors including higher cost of materials and labour. The project remains on time to deliver an additional 100ktpa of concentrate by December 2023.
The final investment decision on the longer-dated P1000 expansion project has been delayed to the March 2023 quarter although $38m of pre-FID funding for long-lead items and front-end engineering and design work has been approved by the Board. P1000 will increase PLS’s spodumene concentrate production at the Pilgangoora mine to 1Mtpa when completed.
Investment View
Falling headline prices for spodumene concentrate will particularly affect PLS given its limited downstream chemical exposure and its more dynamically-priced contracts. This is the principal reason for our recommendation change to Hold.
Otherwise, PLS remains in a strong financial position with $1.5bn cash as at 30 September 2022. Full year production is likely to exceed the 540-580kt guidance for spodumene concentrate.
Consensus earnings forecasts have lifted materially since October last year but may now be too optimistic as prices begin to ease. The key risk to our recommendation is an extended period of elevated spodumene prices.
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 lowered our recommendation to Hold from Buy.
