PILBF - Pilbara Minerals: Strong Prospects But Shares May Become Cheaper

2023-07-13 03:56:03 ET

Summary

• Demand for lithium, a key element in the global energy transition program, is expected to surge due to the growth in electric vehicle production.
• Pilbara Minerals Limited, a lithium ore miner, is set to benefit from this demand increase with plans to significantly increase production in the coming years.
• Despite potential near-term headwinds, the company's robust operations, joint ventures, and growth projects bode well for the future of its business.

This article rates Pilbara Minerals Limited ( PILBF ) as Hold and not higher due to the chance that the shares of this promising lithium ore miner could become more attractive.

The Outlook for Lithium

Lithium is a silvery-white, soft, very light alkali metal (the lightest of the solid elements) and is extracted from lepidolite and spodumene ores.

Lithium is used in metallurgy to manufacture and refine alloys and in nuclear technology. It is also used in organic chemistry as a reducing agent and in the pharmaceutical industry to manufacture psychoactive drugs.

Due to the wide range of applications, the demand for lithium has a very solid foundation, which is sure to strengthen in the coming years, as this alkali metal is a key element in the global energy transition program.

Electric vehicle [EV] production, which is expected to grow very rapidly over the next few years as governments aim to replace most internal combustion engine cars on the market with electric cars in less than a decade, will provide a strong boost to the demand for lithium. The following trend can give an idea of the slope of the growth curve: due to the expected increase in the purchases of EVs, lithium production has to triple over the next 2 years.

As part of the fight against climate change, the main culprit of which is global warming caused by CO2 emissions, the motor power that eco-friendly technologies of electric vehicles need to be able to operate is supplied by electric batteries, the main component of which is lithium.

Developments from the US are very telling in this regard, as the world's largest economy is at the forefront of adopting new technologies aimed at global advances towards a more sustainable world. Next year, US President Joe Biden plans to introduce new passenger emissions regulations that would result in electric vehicles replacing at least 67% of passenger cars, 46% of medium-sized trucks, 25% of heavy trucks, and 50% of buses by 2032.

Pilbara Minerals Limited Will Benefit from the Expected Strong Increase in Lithium Demand

Then, of course, all other countries will join the United States of America for the happiness of the manufacturers of EVs, but also those of batteries and accumulators for EVs and to the delight of those basic materials companies such as Pilbara Minerals Limited that make lithium available through the mining of ore-spodumene concentrates.

For the reasons just described, spodumene ore miners will have to face an unusual surge in lithium demand in the near term. That means that despite the competition that also reigns in this sector, given the size of the pie to be shared, there will be plenty of growth opportunities for Pilbara Minerals Limited.

The Austrian miner provides the following slide, which, as part of the company's presentation on May 2, underlines the expectation that a lithium shortage will develop into something truly unusual over the next two decades.

The estimates on which this chart is based, relate to future events and are therefore subject to the risk that these will not occur at all. However, I believe the following rationale is enough to agree that the estimates of Benchmark Mineral Intelligence analysts - the chart's authors – can imply a high degree of confidence.

The introduction of clean technologies, including those based on lithium, to reduce the emission of toxic gases into the atmosphere is not a new topic, as the fight against climate change has been on the political agenda around the world for decades. But there is no doubt that mobilizing huge amounts of capital to make the economy greener -- aside from getting it back on track after the shock of the pandemic crisis -- has greatly improved the growth prospects for clean technologies, including the demand for lithium.

With the proliferation of technology companies, including electric vehicle and battery manufacturers, ready to propose all kinds of green projects now that they can count on solid government support, the amount of lithium available from today's operators is simply not enough. Furthermore, given the impressive growth potential ahead for lithium production, before it can keep up with the demand, it is also very likely that Pilbara Minerals Limited will decide to explore other markets for spodumene ore in addition to batteries for electric vehicle manufacturers.

The Growth Plans of Pilbara Minerals Limited

Pilbara Minerals Limited is working on plans to take advantage of the growth opportunities that have arisen dramatically due to the improved lithium demand outlook. In fact, it aims to significantly increase production within a few years and increase the value of the asset it will offer to strategic operators in lithium chemical and battery production.

Pilbara Minerals Limited, based in West Perth, Western Australia, owns 100% interest in the Pilgangoora lithium-tantalum project in the Pilbara region of Western Australia, which managed to produce 148,131 dry tons [DMT] of spodumene concentrate in the first quarter of 2023, which corresponds to the third quarter of the company's fiscal year 2023.

Production declined slightly sequentially, down 9%, implying a total operating cost of $783 per unit. However, the company would like to increase the current production level, say approximately 592,524 DMT on an annual basis, to 680,000 DMT by 2023 through the P680 expansion project, and then to 1 million DMT of spodumene concentrate by September 2025 quarter through the P1000 expansion project. The following slide is from the May 2023 company presentation .

Production levels in the third quarter of 2023 enabled Pilbara Minerals Limited to ship 144,312 DMT of spodumene concentrate (down 3% from the previous quarter) sold at an average realized price of $4,840 per DMT (down 15% from the previous quarter).

Short Term Slowdown but Strong Operations and Amazing Price Future

Despite the near-term slowdown, the company's business in lithium's homeland is resilient and the pricing environment is likely to improve going forward.

Despite lower shipments and lower prices, with the final driver of sales revenue of $1.093 billion for the third quarter of fiscal 2023 being impacted by a slowing momentum of China's post-pandemic recovery, Pilbara Minerals still managed to post a strong cash flow generation, thereby increasing its cash position to $2.683 billion as of March 31, 2023, or 20.5% sequentially.

During the period, the company was even able to sustain cash outflow by paying its first semi-annual dividend of 11 cents per share in Australian dollars (or approximately $0.0734) which was paid on March 24, 2023.

This interim dividend was announced in December 2022 based on the very good operational performance in the first half of the fiscal year 2023 and the following scenario should lead to further dividends.

Lithium market conditions remain good going forward, which will combine with the company increasing production and having over 25 years of operation ahead thanks to the opportunity to operate a Tier 1 mineral asset with strong growth potential in Australia. With more than 2.7 million tons of lithium reserves in hard rock mines, Australia is the world leading producer of the alkali metal according to this article from IG.com .

The projected lithium supply and demand gap will create strong upward pressure, keeping the price of the alkali metal high during a possible recession in Western countries and Australia, and it is poised to gain momentum as industrial production and consumer confidence in China get going again. China is the largest consumer of lithium as its electronics and electric vehicle industries boom. The Asian country hosts almost two-thirds of the world’s lithium-ion battery production while controlling the majority of the lithium processing plants around the globe.

The following slide is from the May 2023 company presentation .

On top of this, the company participates in joint ventures to provide value-added products to strategic lithium chemical and industrial companies as well as the battery and electric vehicle industries, which will further increase the profitability of the operations in the future.

In a joint venture agreement with POSCO Holdings Inc. (PKX), a South Korean manufacturer and seller of rolled iron and steel products in South Korea and internationally, they plan to build a 43,000 tons per annum lithium ore processing plant in Gwangyang, South Korea. Major construction work is ongoing, but the commissioning of a second train is expected to be completed before the end of September 2023. Therefore, the foundation is being laid for creating an infrastructure that will be at the forefront of the South Korean hub, which is considered a growing strategic hub due to the presence of the following operators. To name a few: POSCO Holdings Inc. (PKX), LG Chem, Samsung Electronics Co., Ltd., and SK Innovation Co., Ltd., as the leading manufacturers of lithium chemicals and batteries in South Korea. Also, Hyundai Motor Company (HYMTF), SsangYong C&E Co., Ltd., Genesis, and Kia Corporation as the leading automobile manufacturers in South Korea.

Pilbara Minerals is also working in a joint venture with Calix Limited, an Australian environmental technology company, to advance a project to produce a high-quality lithium salt at Pilgangoora. A final investment decision is expected to be made by the board of directors of both companies before the end of September 2023.

The Stock Valuation

Pilbara Minerals Limited shares have received an impressive boost from capital allocated by governments to lithium-based electrification projects as part of their recovery and resilience programs put in place during the 2020 pandemic crisis.

As can be seen from the Seeking Alpha chart below, shares are now 13.5 times where they were in 2020. Lithium market fundamentals are on the way to strengthening and the company's production growth projects are increasingly taking shape, driving these prices likely to show an increasingly positive underlying trend.

The shares are currently (at the time of writing) trading at $3.36 apiece, for a market cap of $10.08 billion. Shares are trading above the 200-day simple moving average of $3.02 and above the 50-day simple moving average of $3.16. They are also 28.4% above the middle point of $2.625 of the 52-week range of $1.54 to $3.71.

Given the bright prospects, these prices can continue to rise and a 14-day relative strength indicator of 58.07x suggests there is ample room to rise, but also to the downside if the shares decide to embark on a modest decline.

Shares of Pilbara Minerals Limited, like most US-listed stocks, may face some negative pressure as the US Federal Reserve at its last meeting on June 14 expected to raise interest rates again to calm inflation.

The shares could eventually move down along the longer-term trend of the 200-day simple moving average. So why not wait for more attractive levels and just stick with the Hold stance for now?

From a longer-term standpoint, shares are likely to trade significantly higher, but with the looming headwinds of the recession, sentiment may suddenly turn negative and forget about the bright lithium outlook as the market is also irrational.

So, since there is an opportunity for a more convenient entry point with a player with robust growth prospects, I would then play the card of patience right now.

Conclusion

Pilbara Minerals Limited sources lithium ore from Australian land, where the world's first reserves of this alkali metal are located. The company is working on production growth projects in line with the demand outlook, which is very strong. There will indeed be a significant lithium shortage that Pilbara Minerals Limited and other operators will have to fill, taking advantage of the many growth opportunities. Prices for the alkali metal have been boosted by the government's stimulus and resilience programs prepared during the pandemic crisis and are expected to continue rising, helped by the need to curb polluting activities beginning with the electrification of mobility. Lithium prices have been showing slight signs of weakness recently as China, the world's largest consumer of lithium, shows signs of deflation.

But aside from these short-lived headwinds, the future for lithium producers looks bright. Pilbara Minerals Limited also has resilient operations that increase the chances of success of production growth projects and is working to expand its range of value-added products for a strategic center in South Korea. This is a technology-intensive area, also because of the proximity to semiconductor industrial sites. Shares of Pilbara Minerals Limited could become somewhat cheaper if the recessionary winds pick up due to tighter monetary policy. As such, I would wait for these lower price levels to materialize with a Hold rating on Pilbara Minerals Limited shares for now.

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