Ground Breakers: Pilbara Minerals toasts 'cracking quarter', tucks $850m of lithium winnings into its back pocket

Pilbara Minerals tucked $9.25m in its back pocket every single day in the December quarter
Investors send shares soaring ahead of 2023 dividends as prices of US$5668/t back $851.1m cash build
Liontown goes the other way after revealing major capex blowout at Kathleen Valley development in WA

Pilbara Minerals (ASX:PLS) boss Dale Henderson critiqued bearish commentary on the lithium market as the battery metals giant printed over $9 million in cash a day through the December quarter.

PLS saw prices for its Pilgangoora spodumene lift 33% to US$5668/dmt on a 5.4% lithia basis, or US$6273/t if converted to a 6% spodumene price, with production lifting 10% to 162,151t and shipments rising 8% to 148,627t.

That came at operating costs of US$579/t on an FOB Port Hedland basis, down from US$612/t in the September quarter, with CIF China costs up from US$1100/t to US$1169/t in part because of royalty payments on higher prices.

It underpinned a cash build of $851.1 million, or $9.25m for each of the 92 days in the December quarter, with Pilbara’s swelling bank balance rising 62% to $2.26 billion.

Its shares soared more than 10% on the news.

PLS announced higher contract pricing with its long term customers late last year, locking in strong prices for the bulk of its production amid strong demand from converters in China.

Henderson touched on market pressures that have seen prices for lithium chemicals, key components in electric vehicles where sales rose 56% to around 10.5 million units in 2022, fall in recent weeks.

He said there remained “no better growth story” than lithium despite a 15% drop in lithium hydroxide and carbonate prices in China since its Covid reopening began in November.

“In the near term horizon, and particularly when we look back the last two months, there has been some pullback, we’ve seen a 15% reduction in chemicals pricing from those highs in November,” he said.

“But when we say 15% that’s coming off a high US$80 (per kg) mark down to sort of a high US$70 mark. And then when you’ve start to ask yourself what drove that, well, (it’s) largely Chinese-centric, it was the Covid unlocking going from the zero Covid policy to the gates were lifted and coupled with the EV subsidies being removed and taken back.

“Plus we’re heading into Chinese New Year, the sum of those things as equated to approximately 15% reduction.

“My suggestion I’d put to you is 15% reduction off those highs is not that bad, we’ve got very healthy pricing and had I been asked six months ago for a prediction around China pulling up the gates and going from the zero COVID policy to fully COVID integrated into the society, to be honest I think the impact is pretty modest, all things considered.”

Supply challenges facing industry

PLS is expanding by constructing a downstream joint venture with industrial giant POSCO in South Korea, as well as increasing its capacity at Pilgangoora to 680,000tpa.

An FID on a further expansion to 1Mtpa at the world class spodumene mine is due this quarter, though that has an air of foregone conclusion about it despite capex blowouts on the smaller scale expansion, with PLS’ board already committing funds for early works.

Henderson echoed comments from his predecessor Ken Brinsden, and previously from his own mouth, that supply would be harder to bring online than anyone imagined.

“We know that because we’ve done it and it will not be easy. It is not straightforward. It does not matter which raw materials lithium supplier that you’re dealing with, whether it be brines, hard rock or clay,” he said.

“They’re all difficult, they’re all bespoke. Capita helps but it does not guarantee speed.

“So when we start to consider supply versus demand, as we look forward, we feel we’re in a good position.”

When it comes to the market, one area that may disappoint investors is that PLS will no longer report results from its Battery Material Exchange auctions, which have provided a pointer for spot lithium price discovery over the past 18 months, with recent cargoes shipping at in excess of US$8000/t on a 6% Li2O basis.

Meanwhile, PLS has faced questions on its M&A ambitions, with Tianqi and IGO’s recent acquisition of WA junior Essential Metals (ASX:ESS) for $136 million signalling a recent shift among majors to look externally for new resources.

“Obviously, backyard is the best place you could go in terms of we know the area well,” Henderson said.

“As to offshore there’s many options out there, but one of the things we’re very sensitive to is our offering to the market being a tier one asset in a tier one location.

“We’ve considered very deeply our next step around making sure we didn’t dilute that offering. I can’t give you a steer as to one over the other event, but the months to come will provide a bit more insight into how we think about M&A and that (additional leg) of our strategy.”

Pilbara Minerals (ASX:PLS) share price today:

Liontown increase capex, scale at Kathleen Valley

In a nod to the shifting uncertainty around future lithium supply, PLS peer Liontown Resources (ASX:LTR) announced an upward revision of costs at its Kathleen Valley mine in WA’s Goldfields.

Due to hit the market in the middle of 2024, Kathleen Valley’s first stage is expected to deliver 500,000t of spodumene into the lithium market once ramped up.

But a review has upped costs to $895m and seen LTR propose a larger operation than first proposed, with the developer announcing an increase in processing capacity from 2.5Mtpa to 3Mtpa and looking into the potential to ship DSO lithium to raise capital in the underground mine’s early stages.

Including a $40m contingency, that’s $350m more than the $545m outlined at FID in June 2022.

Liontown could face a funding conundrum from the end of 2023, with only $73m of capital on the project spent so far, with its $385m cash reserves and $300 million project loan from Ford in reserve.

That could prompt a return to equity or debt markets to bankroll the larger Kathleen Valley operation. LTR shares unsurprisingly copped a hammering, down almost 10% at 11am AEDT.

LTR managing director Tony Ottaviano said the capex blowout reflected macro pressures on costs and pricing, saying the company needed to be realistic about what it can and can’t control.

Alongside the increase processing capacity, LTR will add 60% on top of its mining accomodation capacity to bolster its workforce and de-risk its schedule, take some infrastructure in house including workshops, changerooms and admin facilities and add more wind turbines to its power mix.

It has also seen “substantial escalation” in rates across labour intensive contracts “with some tenders experiencing price increases greater than 30%”, flagging issues also with productivity and the number of tenderers willing to bid on contracts.

But it has for now maintained the mid-2024 opening date for the Kathleen Valley mine.

“We have said from the outset that our overriding commitment is to deliver Kathleen Valley to its full potential – safely, on time and fully optimised for early tonnes and long-term value,” Ottaviano said.

“The scope adjustments announced today will allow us to increase the initial project throughput by 20 per cent to 3Mtpa, bringing forward additional SC6.0 tonnes into a market which remains extremely short of lithium units and continues to see very strong pricing outcomes.

“This, together with the exciting new DSO opportunity we have identified during project and mine schedule optimisation, opens up the potential for increased tonnages and revenues at an early stage in the mine life – an attractive opportunity given strong pricing and market conditions.

“The updated capital estimates provided today incorporate these important changes as well as the macro reality of rapidly changing pricing and cost assumptions. Our team continues to do a fantastic job in working to mitigate these forces and maintain cost control and discipline across the organisation.

“However, we need to be realistic about what we can and can’t control – with the overriding objective of meeting our schedule while maintaining the highest possible standards of safety for our people.”