Pilbara Minerals Limited is an emerging lithium and tantalum producer focused on the development of its 100% owned Pilgangoora Lithium-Tantalum Project, located approximately 120kms from Port Hedland in the Pilbara region of Western Australia.
Pilbara Minerals is the leading ASX-listed pure-play lithium company. It currently owns 100% of the world’s largest, independent hard-rock lithium operation. Located in Western Australia’s resource-rich Pilbara region, the Pilgangoora Operation produces a spodumene and tantalite concentrate. The significant scale and quality of the operation has attracted a consortium of high quality, global partners including Ganfeng Lithium, General Lithium, Great Wall Motor Company, POSCO, CATL and Yibin Tianyi.
While it continues to deliver a low-cost, quality spodumene to market, Pilbara Minerals is pursuing a growth and diversification strategy to become a sustainable, low-cost lithium producer and fully integrated lithium raw materials and chemicals supplier in the years to come.
Through execution of this strategy, Pilbara Minerals is positioned to become a major player in the rapidly growing lithium supply chain, underpinned by increasing demand for clean energy technologies such as electric vehicles and energy storage as the world pursues a sustainable energy future.
Pilbara assets are focused on one site in Western Australia, the Pilgangoora Project. Pilgangoora is the second largest Australian deposit of lithium and will be the first one when the Ngungaja processing plant will be running. It is in the lower half of the resource grade, at 1.26% Li2O. This is equivalent to 2.8 million tons of pure lithium, or 46 million tons of 6% spodumene concentrate. Even at the future 1 Mtpa yearly production from 2024, this gives the deposit a very long lifespan of 46 years.
The project has 2 processing plants, producing 6% Li2O spodumene concentrate and 5% tantalite concentrate:
Pilgan Processing Plant: the only running plant of Pilbara at the moment, it has a nameplate capacity of 330 ktpa (thousands of tons per year) of 6% spodumene concentrate, with ongoing improvement to quickly increase this number by 30-50 ktpa. Later expansions are planned to increase the capacity up to 500-850 ktpa.
Ngungaju Processing Plant: In 2020, the plant has been purchased by Pilbara and was previously named the Altura Lithium Project. The plant was idle during the period of low lithium price in 2019 and still is at the moment. Thanks to the recent lithium prices rebound, Pilbara plans to begin the restart of this plant by the end of 2021, for a full production restart by mid-2022. The full capacity of this plant will be 180-200 ktpa.
Future expansion plans for both plants have been made, to reach up to 1Mtpa spodumene concentrate total production in the 2024 period if lithium price allows. A later phase 3 expansion has also been studied, to reach a maximum of 7.5 Mtpa, depending on the lithium price outlook.
Valuation and recommendation
Our recommendation for Pilbara Minerals is a BUY (upgraded from Hold to Buy on February 21, 2022, based on the recent share price pullback and strong ongoing lithium prices). The company has a lot of spare capacity that can be mobilised quickly in less than a year, thanks to a very well-timed acquisition of a second processing plant. The company has demonstrated great capital discipline and flexibility in facing very volatile lithium prices. This is now rewarded with the company being able to profit from the lithium price rebound.
Pilbara has a solid balance sheet, has managed to refinance at much lower rates, and has sufficient cash and cash flow to pursue its ambitious capex program. Its ore reserves are very large and can support much higher levels of production, which will be further supported by ramp-up initiatives across both the Pilgan and Ngangaju plants. The capacity for incremental production increases allows the company to quickly react to lithium price rises. On the other hand, in case of a price crash, it can mothball some of its processing plants to reduce costs and weather the downturn.
After the FY22 full year results, it is clear that Pilbara Minerals is one of the few established hard rock producers that will benefit greatly from the massive uptick in lithium prices. Margins have increased massively and the vast majority of profit was generated in the last two quarters of the financial year. This coupled with massive revenue generation, BMX price discovery auctions, JVs with Posco and Calix, plus the possibility of near term dividends, we have upgraded our target price for PLS to $5.50 from $4 as at September, 2022. The existence of various near term catalysts for the company has the market quite excited. With the September quarterly report around the corner and the long awaited Capital Managment plan coming by Christmas time, Stock Specialist has upgraded the expected target price to $6.50 as at October, 2022.
Macquarie Valuation (March 2022)
As at March 2022, Macquarie Group conducted further analysis into the potential valuation of Pilbara's valuation going forward into the second half of FY22 and have raised their price target to $4.00 matching Stock Specialist's target price.
See Key points below:
Pilbara Minerals is the preferred lithium play according to Macquarie analysts
Macquarie expects spodumene prices to peak at around US$4,000 a tonne
“Pilbara Minerals retains the greatest exposure to the further price rises we expect to see in spodumene over the next few months, with our price peak now set at US$4,000 a tonne” said a note from Macquarie Research earlier this month.
Production growth on the horizon
Macquarie expects Pilbara Minerals to "start seeing material growth in production volumes from FY23.”
This follows a third consecutive downgrade to the company's FY22 production guidance during February reporting season. Pilbara Minerals expects to produce 340,000 to 380,000 dry metric tonnes (dmt) of spodumene for FY22, down from the 460-510,000 dmt guidance last August and 400-450,000 dmt guidance last December. Lower spodumene production rates due to plant down-time events and industry-wide labour shortages has weighed.
"Pilbara Minerals expects March quarter spodumene prices to sit somewhere around the US$2,500 to US$3,000 a tonne level, more than double what was realised in the first-half of FY22. Macquarie’s medium and long-term upgrades for spodumene price forecasts drove a 14% upgrade to its Pilbara Minerals price target from $3.50 to $4.00. This represents a 52% upside compared to Wednesday's open of $2.63."
Lithium has evolved in the last 10 years from a minor commodity, mostly used for Li-Ion batteries of electronic devices, to a key component in the ongoing electrification of transportation.
The third quarter of FY21 saw a continued strengthening in the global demand for lithium raw materials. While China domestic lithium carbonate prices were stable, China domestic lithium hydroxide prices increased by 16% to regain their premium over the lithium carbonate price (Asian Metals).
Lithium prices reached a new all-time high in early September. surpassing the previous highs of 2018, reaching US$20,500/t for lithium hydroxide battery grade material. With most of the extra capacity in the lithium industry not expected before 2023-2024, Pilbara should be able to finance its expansion from 2022 cash flows.
In case of continuing high prices or even higher prices, Pilbara is ideally positioned to push online more capacity quickly and use the extra cash to pay back debt.
In case of a downturn, the relatively low debt load and flexible cost structure should ensure the company will be able to weather the storm.
In the long term, we expect a continuation of the strong political push toward transportation electrification (EU, USA, and China), together with large stimulus bills in the USA and Europe. This should put a relatively high floor to lithium prices. The quickly increasing competition in the electric vehicle market and the growing offer from more car brands like Ford, Audi, or Volkswagen should also be a positive trend, as it will convince more people to switch to electric cars.
Additionally, in the broader market there is a semi-conductor shortage and the automotive industry is learning about the danger of a low inventory of critical elements. This is likely going to lead to many manufacturers locking in lithium supply, instead of risking shortage stopping the whole factory line. This should increase demand in the short term and help reduce the volatility of lithium prices.
Electrification should stay a large investment topic for the decades to come, and the electrification of trucks, buses, and other vehicles should accelerate the trend already visible with cars. The main question going froward will not be the growing need for lithium, but the speed of electric vehicle adoption and the future competition coming from battery recycling. The use of lithium batteries for utility-scale battery packs is also yet to be seen.
In the very long term (10 years and more), a risk persists of new battery technology being less or not at all reliant on lithium, replacing the current domination of lithium-based batteries.
During the June quarter of FY21, the spodumene spot market continued to tighten. Price reporting agencies (including Platts, FastMarkets and Asian Metals) are currently citing reasonably significant variation in spodumene concentrate price outcomes, varying between approximately US$700 and US$975/dmt (CFR China basis). This wide variance is likely explained by either the speed with which the market is developing and/or the effect of either contract delivery or spot pricing basis being reported.
In the December quarter, however, given the sharp rise in the lithium spot price Pilbara have received average prices in the range of approximately US$1,750 to US$1800/dmt (CFR China basis). The indicative pricing for the March 2022 quarter under existing offtake contracts expected to be in the range of US$2600 to US$3000/dmt (CFR China basis). This dramatic increase in the spot price has greatly assisted in the profitability of Pilbara's mining activities.
In Pilbara Minerals’ view, it is now clear that there is currently a disconnect between longer dated spodumene offtake pricing outcomes which reference lithium chemical pricing inputs, compared to the emerging ‘spodumene spot sales market’. Currently there appears to be a shortage of spodumene supply to support available chemical conversion capacity in China, which is driving a fundamental shift in the value being placed on spodumene concentrate, leading to higher price outcomes on a ‘spot basis’.
Pilbara Minerals is seeking to maximise its exposure to this dynamic via its BMX digital sales platform, facilitating trade auctions for any product available outside existing longer dated offtake arrangements. Pilbara Minerals is also intending to undertake price reviews with its offtake partners (as allowed for under its offtake agreements) to address these fundamental changes to the manner in which prices are set in the current market for spodumene concentrate.
During the Quarter, Macquarie Bank materially upgraded its outlook for spodumene prices, forecasting that prices will rise between 7 and 30% between calendar year (CY) 2021 and CY2025 due to a lack of independent supply for third parties. Other investment banks have supported this view, with Credit Suisse recently saying that the lithium supply glut has ended with the market now “tightening as the electric vehicle revolution accelerates”. In a recent report (7 July 2021), Deutsche Bank said that it sees the lithium market deficit widening in upcoming years driven by robust China electric vehicle demand and supply facing emerging risks on ESG scrutiny. Deutsche Bank has raised both its medium and long-term lithium demand forecast by ~9% to reach 1.1Mt LCE (lithium carbonate equivalent) by 2025 and 1.95Mt by 2030. At the same time, the bank has reduced its supply numbers by 1% and now anticipates 2025 supply of 947,000t.
R&D and future growth
Pilbara is not only looking to expand its upstream production of lithium ore and spodumene concentrate but is also investing in the rest of the lithium supply chain.
In a joint venture with Atlas Iron Limited, Pilbara (70% partner) is investing in the Mt Francisco project, which is situated 50km southwest of the Pilgangoora project. It is the only other large known deposit of lithium-rich rocks in the area of Port Hedland. Preliminary drilling has been conducted and returned high concentrations of tin, tantalum, and lithium. The project area is currently only partially explored and no production is planned as of yet.
In partnership with Calix, Pilbara is working on a new method to produce lithium concentrate that would be less carbon-intensive. This would allow on-site extraction of the aluminosilicate waste, instead of shipping them in the spodumene concentrate.
The final product would be 35% Li2O salts, instead of the current 6% Li20 concentrate. The two companies are discussing the building of a demonstration facility on the Pilgangoora site.
Pilbara has also created, in partnership with GLX Digital, the Baterry Material Exchange (BMX) platform. This digital trading platform is dedicated to battery raw materials. The exchange will provide Pilbara with a new avenue for selling its products, especially the non-allocated new production from the restart of its second processing plant and further expansion plans.
Additionally, Pilbara has proposed a joint-venture with POSCO to develop a 43,000 tpa lithium chemical conversion facility in South Korea. It is proposed Pilbara Minerals will initially hold a 21% interest in the JV, with an option to increase to 30%. This should provide Pilbara with a valuable entry point in the new and growing Korean lithium market. POSCO is a steel provider to the automobile industry and is now expanding to become a provider of the whole electric vehicle industry.
Joint Venture with POSCO
In October, Pilbara announced it had entered into a Joint Venture (JV) in South Korea with POSCO, a South Korean steel-making company, to construct and operate a 43ktpa LHM primary lithium hydroxide chemical processing plant, or Conversion Facility. The JV supports Pilbara's objective of becoming a fully integrated lithium raw materials company and will diversify the company's global market base by providing it with exposure to the rapidly growing South Korean lithium chemicals market. Pilbara Minerals will initially hold an 18% interest in the JV, funded largely from the previously announced A$79.6M Convertible Bond Agreement with POSCO, with a Call option granted to allow Pilbara Minerals to stage its investment to increase its JV interest to 30%, for a period up to 18 months after the successful ramp-up of the Conversion Facility. An Amended Offtake Agreement to supply 315ktpa of spodumene concentrate to the Conversion Facility at market pricing for the lesser of 20 years and the life of the Pilgangoora Project was signed, with the JV to provide a US$25M offtake pre-payment facility to Pilbara Minerals to fund general working capital and future expansions at the Pilgangoora Project. The conversion plant is set to play an integral role in POSCO’s supply chain and business strategy as it becomes a major battery materials supplier to global markets.
Despite headwinds, Pilbara has provided some guidance for the 2022 financial year. Original production forecasts for spodumene concentrate are between 400-450,000 dmt, with shipments forecast between 380-440,000 dmt. These have been revised down from the original FY22 guidance (see below "Production Guidance Update"). Costs are expected to be higher in FY2022, with guidance between A$525-A$575/dmt. Elevated costs are expected to continue in Fy2022 and Fy2023, driven by higher strip ratios, Pilgan production ramp up and the restart of Ngungaju operation with an expected production target of 560-580,000 tpa by mid-CY2022. Beyond FY2023, Pilbara estimates costs will decrease below A$500/dmt once strip ratios moderate, nameplate production capacity is achieved, throughput increases, better utilisation rates are achieved, and synergies are won from the company’s combined operations.
Pilbara plans to ramp up capital expenditure in FY2022. $34.6m is expected to be spent on the Ngangaju plant restart and $9.8m will be directed to improvements at Pilgan to increase capacity to 360-380,000 tonnes per annum. Another $9.7m is expected to be invested at Pilgan for projects including renewable energy, production handling, NPI and TMF cell two raise. $6.5m has also been allocated as sustaining capital. Higher mining strip ratios will be required to advance Central and South pit development to access sufficient ore to support higher plant throughput. Final guidance on capitalised mine development costs for FY2022 will be provided post completion of the upcoming combined and updated Reserve statement, which will represent the expected mine plan for the integrated operations.
Pilgangoora Production and Shipping Update - March Quarter 2022
On December 21, Pilbara released an update on growth projects at Pilgangoora along with some further production guidance. Staged restart of production from the Ngungaju Plant in progressing, with total annualised spodumene production capacity from the plant of approximately 180,000 to 200,000 dry metric tonnes (dmt) expected from July 2022. The ramp-up of plant improvements is continuing at the Puilgan Plant with annual spodumene production capacity targeting an increase of 10-15% to 360-380,000 dmt from March Quarter 2022. Quarterly production for March was 81,431 dmt of spodumene concentrate, within previous guidance of 75-90,000 dmt. Shipments for the quarter totalled 58,383 dmt, following a port delay in loading a 20,000 dmt cargo which was scheduled for late March, but departed Port Hedland in early April. Average March Quarter realised sales price of ~US$2,650/dmt (CIF China, SC6 basis) was within previous guidance of US$2,600-3000/dmt, inclusive of a December Quarter sale that was shipped in the March Quarter. Pilgangoora remains on track to achieve FY22 annualised production guidance of 340-380,000 dmt, assuming no further material impacts from COVID-19.
Material Increase in Ore Reserves
In October 2021, Pilbara also announced the discovery of new pegmatite domains, which together with the integration of the Nganugaju Resource, have led to a 54% increase in the company’s total Proved and Probable Ore Reserve Tonnes and a 47% increase in the contained lithium oxide at Pilbara’s 100% Pilgangoora Lithium-Tantalum Project, totalling 162Mt. Pilgangoora Ore Reserves contains an estimated 1.9 million tones of contained Li2O and 36 million pounds of Ta2O5, extending the mine life to approximately 26 years based on the combined 6.3 Mtpa operations (consisting of the 1.3 Mtpa Ngungaju process plant and the proposed Pilgan 5 Mtpa expanded process plant). Pilbara also stated that further opportunities exist to further expand the Mineral Resources and Ore Reserves, with further drilling campaigns expected to be completed during FY2022.
The day after Pilbara released further announcements regarding the commencement of commissioning of the coarse production circuit at the Ngungaju plant. Commissioning is now underway as Pilbara commences a staged ramp-up of the facility from its current state of care and maintenance, and follows a successful construction and maintenance acceleration program to bring forward additional production and realise additional sales opportunities. This is the first step of a staged recommissioning for the Ngungaju operation, with the fines spodumene processing circuit expected to commence production within the March Quarter 2022. Annual production capacity of approximately 180,000 to 200,000 dmt is expected from the Ngungaju plant following completion of ramp-up from mid-2022 onward, complementing existing production capacity from the adjacent Pilgan Plant (~330,000tpa increasing to 360-380,000tpa following completion of improvement works).
Pilbara made a further announcement on October 13, stating the first spodumene concentrate production had been achieved from the coarse production circuit at the Ngangaju Plant, marking another key milestone in the company's rapid growth trajectory.
December 2021 Half-Year Report
Pilbara Minerals have greatly benefited from surging lithium prices and increased demand, and this has been represented in their half-yearly report. The key points include:
170,228 dry metric tonnes (dmt) of spodumene concentrate was shipped; a 49% increase on the 114,239 dmt shipped for the December 2020 half-year.
Record sales revenue of A$291.7M achieved (1H FY2020: $59.1M) on buoyant market pricing conditions.
EBITDA was up to $151.1M compared to $3.2M in 1H FY2020
Statutory profit after tax reported was up to $114M compared to a statutory loss after tax of $21.2M in the previous period
Pilbara received an average selling price of approximately US$1,250/dmt and are expected to receive spot pricing in the range of approximately US$3,750-4,500/dmt in the next quarter which represents over a 300% increase in their projected revenue.
PLS March Quarterly Report
March quarter metrics were in-line with the company’s guidance, with average spodumene prices achieved in the March quarter was US$2,650/dmt, in-line with the prior guidance range between US$2,600 to US$3,000 dmt.
Pilbara Minerals reaffirmed its FY22 annualised production guidance of 340,000 to 380,000 dmt, though flagged that any continuing covid impacts could see production land in the lower half of the guidance range.
The Pilgan Plant Improvement Project was successfully commissioned, re-rating its production capacity from 330,000 tpa to 360-380,000 tpa of spodumene concentrate.
The restart of production from the Ngungaju Plant (acquired from Altura Resources in Dec 2020) was going according to plan, targeting 180-200,000 tpa in production by the September quarter.
$20M Grant from the Federal Government
As at the 17th of May, Pilbara Minerals and their joint venture partner Calix, has been awarded a $20 million grant from the Australian Government under the Modern Manufacturing Initiative (MMI).
This grant funding will be used as part of a joint venture (Joint Venture) to be entered into between Pilbara Minerals and Calix for the progression of a demonstration scale chemicals facility at the Pilgangoora Project - with the aim of producing lithium salts for global distribution via an innovative midstream “value added” refining process.
Both of these parties are targeting to finalise and execute the formal Joint Venture Agreement by early Q3 2022, with a final investment decision on the project to be decided late 2022 / early 2023. The Parties will liaise with the Australian Government to finalise the execution of the MMI grant funding.
BMX Auction Results
One of the innovative applications of Pilbara Minerals is their interaction with the lithium carbonate spot market. They have developed an online platform where various lithium buyers can bid in an auction setting to acquire Pilbara's lithium carbonate products at 5.5% lithia. The 5.5% carbonate is used as it generates less waste to produce and passes on the costs of uplifting the content to the consumer rather than the company.
Since its inaugural auction last year, the company has received stellar growth in the prices they have received. The first BMX auction they conducted generated price discovery of US$1250/dmt and on the 25th of May, the company received US$5950/dmt. In just a matter of a few months, the price received 400% growth. This signals continued strong demand for the lithium sector as a whole.
Full Year Results (FY2022)
Pilbara FY2022 results reflected a massive turnaround in operational performance and improving market conditions in the second half of the year. The profit result was driven by a strong operating performance from the Company’s worldclass Pilgangoora Lithium-Tantalum Operation in the Pilbara region of Western Australia, which delivered a gross margin from operations of $853.5M. 361,035 dry metric tonnes (dmt) of spodumene concentrate was shipped over the year, at an average unit cash operating cost of A$555/dmt, supported by strong customer demand during the second half of the year. PLS recorded positive EBITDA of $814.5m. This was Pilbara’s first reported profit after tax of $561.8m was an improvement on the statutory loss of $51.4m recorded in FY21.
During the year, Pilbara completed the strategic purchase of Altura Lithium Operations (ALO), located immediately adjacent to the Pilgangoora Lithium-Tantalum Project. The acquisition was funded via a fully underwritten $240.2m equity raising.
During the year, Pilbara Minerals strengthened its balance sheet following the successful refinance of the US$100M Nordic Bond with the low-cost US$110M senior secured syndicated Finance Facility provided by BNP Paribas and the Clean Energy Finance Corporation. Under the terms of the Nordic Bond, the Company paid a $5.9M redemption call premium for its early repayment, with this amount required to be expensed for accounting purposes. The low-cost Finance Facility provides an extended non-amortisation period before principal repayments commence from September 2022 at a significantly reduced interest rate of ~5% (when compared to the previous comparative period). Pilbara Minerals had a cash balance of $874.2M at year end, inclusive of $282.4M of irrevocable letters of credit for completed shipments.
Pilbara also reached an agreement with its existing lenders to increase its senior debt facilities to support the planned expansion in production from its Pilgangoora Project in Western Australia and the Altura acquisition, increasing the existing Finance Facility to US$110 million.
Pilbara Minerals does not pay a dividend.
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