• Pilbara Minerals approves $560 million expansion at Pilgangoora to upwards of 1Mtpa spodumene
  • Shows major lithium miners are chasing and adding to production amid strong demand and against weak equity market sentiment
  • RBC initiates PLS coverage with outperform rating and $5.65 price target

Albemarle’s attempt to buy out Liontown Resources (ASX:LTR) at a more than 60% premium has spurred a rush from investors back into unloved lithium stocks.

And the news is heating up even further, with Pilbara Minerals’ (ASX:PLS) decision to approve a $560 million expansion to 1Mtpa at its flagship Pilgangoora lithium mine this morning.

The final investment decision to boost production by 47% from its already approved 680,000tpa expansion project has come as little surprise, given the remarkable war chest built up by the miner in recent times.

PLS delivered a $1.24 billion net profit for the first half of the financial year and inaugural dividend worth almost $330m, with $2.23b in cash in the bank at the end of December giving it a tidy buffer for major capital investments.

That came after spodumene prices on a 5.4% Li2O basis quadrupled from US$1232/dmt in the first half of 2022 to US$4993/dmt in the first half of 2023.

The approval of the 320,000tpa capacity addition exposes the gulf between the bullishness of miners facing strong demand for their product and the bearishness of investors staring only at falling chemical prices.

While north Asian hydroxide prices have fallen from over US$80,000/t last year to US$62,000/t yesterday, and US$49,500/t for carbonate, and carbonate prices are now just US$37,800/t in China, those prices remain high by historical standards.

At US$5350/t, spodumene spot prices are still upwards of 8x PLS’ mine cost base.


Further moves downstream

PLS plans to have the first concentrate from its expanded Pilgangoora plant out by March 2025, with the ramp up to full production completed by September 2025.

It could be a very different company by then, with PLS the junior partner in a 43,000tpa lithium hydroxide facility currently under construction by POSCO in South Korea.

Strategic options to maximise value from the 1Mtpa expansion project are being considered, PLS said, including spodumene offtake and JV opportunities to further integrate its business downstream.

At the newly expansed level, PLS managing director Dale Henderson says the company would still have 25 years of mine life ahead of it.

In strong pricing conditions, Pilbara could generate as much as 1.2Mtpa at a 5.7% grade at the project’s peak in FY26 and up to 1.325Mtpa at a product grade of 5.2%.

“This expansion step facilitates a major lift in production capacity, capitalising on the substantial scale of this Tier-1 hard rock asset which underpins a ~25 year mine life at this new expanded production level,” Henderson said.

“This reinforces the exceptional scale and quality of our Pilgangoora Project, which is one of the few hard rock lithium production operations globally that has both the resource size and an existing operating platform to enable a rapid scale-up of production to capitalise on the growing demand for lithium products.

“From the outset, our long-term growth strategy has been to develop each stage with a focus on tailoring production to meet demand, while also planning for future expansion opportunities.

“The P1000 Project increases our nameplate production capacity by approximately 47%, driven by continued strong demand for our product, and leverages the planning and ongoing work being undertaken as part of the current P680 Expansion Project.

“The P1000 investment case is compelling with a payback from this investment expected to be within a year. This further increase in production capacity will cement Pilbara Minerals’ position as a globally significant supplier of lithium materials products delivering into this rapidly growing market.

“The Company has received significant inbound interest for further offtake and downstream partnerships, and we have begun exploring options to maximise the value of the additional product from P1000 including new offtakes and downstream partnerships to extract greater value along the battery minerals supply chain.”


Pilbara Minerals (ASX:PLS) share price today:


PLS an ‘outperform’: RBC

Even before the news today, which has the stock up some 3.25% to $3.98 this morning, some analysts were calling for a PLS rerate.

The company lifted almost 15% yesterday as it emerged Albemarle wanted to pay over 5 billion bucks in cold hard cash to consume Liontown, which has a tier 1 resource at Kathleen Valley in WA but faces an $895 million capex bill to get production up and running at the proposed 500,000tpa mine by mid-2024.

READ: Albemarle’s $5.2bn bid for Liontown shows what tier 1 lithium assets are really worth. Tier 1 assets like these.

RBC analyst Kaan Peker put a $5.65 price target on PLS yesterday.

For context, the $12 billion miner’s all time high is $5.50, achieved in November last year, and between January 25 and March 27 its shares fell more than 32.5% to $3.44.

That shows negative sentiment, while closely aligned to a drop in the lithium price, is somewhat divorced from the cash flow generating potential of lithium miners, even at lower prices than we see today.

RBC’s $5.65 price target and outperform rating is calculated at long term prices of just US$1250/t for spodumene and US$17,500/t for hydroxide, around a quarter and a third respectively of current Fastmarkets spot prices.

“PLS offers peer-leading FCF yield (FY24E 21%) and strong FY23-24E earnings/EBITDA growth on the back of lower risk lithium production growth, elevated lithium prices and improved operational performance,” Peker said.

“PLS is self-funded despite large growth plans, has a strong balance sheet (A$2.1b net-cash), and recently announced an inaugural dividend. We also see long-term optionality given the quality of Pilgangoora orebody. PLS is trading on a 12-month forward EV/EBITDA of ~2.5x, below peers (~4x) and mid-cycle (~6x), and 0.74x NAV.”

He says lithium carbonate equivalent production from PLS’ Pilgangoora mine should rise from 53,000t in FY22 to 107,000t in FY25, before factoring in the 1Mtpa upgrade, a three-year CAGR of 27%.

“For FY23-24, we forecast production growth and lagged pricing will keep earnings elevated (~4x vs FY22), despite our declining lithium price deck,” Peker said.

“We view PLS’s production growth as lower risk vs peers, 1) with ~90% of growth from brownfield expansions; 2) Pilgangoora’s large reserves, which are consistent and relatively high lithium grade; and 3) PLS’ ability to direct ore to two processing plants (Pilgan and Ngangaju), providing operational flexibility.

“In our view, PLS’s strong FCF yield, dividend and balance sheet positions the company well to protect near-term valuation multiples. Furthermore, as a producer with uncontracted spodumene volumes, PLS is the most leveraged to near-term lithium price moves (across our lithium coverage).

“We see this as a positive, with lithium prices expected to stabilise over 2023 on improving Chinese EV demand.”


And on the markets?

Lithium yesterday, gold today, still lithium today, and a little bit of iron ore as well.

The commodity space is looking frothy on Wednesday with higher prices across gold and iron ore, and hopes of a takeover tango in lithium sending the sector higher.

Materials stocks were up 1.12% this morning, with a broad swathe of miners entering the green.

Tantalisingly Liontown Resources was up 1.75% to $2.625. Investors clearly expect a better offer from Albemarle or a competitor over its $2.50 bid rejected yesterday by the prospective lithium producer is on its way at some point.

The gold triumvirate of Evolution (ASX:EVN), Northern Star (ASX:NST) and Newcrest (ASX:NCM) also caught a bid after gold rose 0.9% overnight on US economic risky business to US$1974/oz.

Hopes of stronger steel demand in China sent iron ore prices back above US$120/t and Fortescue Metals Group (ASX:FMG) up 1.8%, while Allkem (ASX:AKE) and South32 (ASX:S32) were also heading higher.

BHP (ASX:BHP) gained 1.35%, with Rio Tinto (ASX:RIO) up 0.66% and fellow iron ore miner Champion Iron (ASX:CIA) up 3.97%. Mid-cap goldie Silver Lake Resources (ASX:SLR), uranium miner Paladin (ASX:PDN) and Julimar explorer Chalice Mining (ASX:CHN) were also big winners.

The large cap leader, though, was a left field one, with lab services provider ALS (ASX:ALQ) up 3.9%.


Ground Breakers share price today: