Pilbara Minerals looks like a lithium winner as it expands capacity
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Officially opening a factory long after it has started production always seems a bit daft — unless there’s something important to announce.
That’s certainly the case with Pilbara Minerals (ASX:PLS) which opens the first stage of its Pilgangoora lithium project in WA on Friday — while earlier today giving the green light to a second stage expansion.
Stockhead will be joining the gang on a visit to the site which is amusingly close to last week’s train wreck on the BHP iron ore line connecting its inland mines with Port Hedland.
What travellers should see in the first stage of Pilgangoora is the start of a project which will become a world-class supplier of lithium to the chemical processing industry of China. That, in turn, feeds the makers of batteries for electric cars and a growing range of portable appliances.
Lithium, for anyone not up to speed, is a key component in the currently preferred battery technology which also requires large amounts of graphite, cobalt, nickel and copper in a mix that varies between battery makers.
Investors who have been playing the lithium game have done well, so far.
But like all new mining adventures (and new technologies for that matter) there is a pecking order that quickly develops — with first-movers often the winners, provided they can meet customer specifications.
In lithium the earliest movers and biggest winners have been the existing producers such as Albemarle of the US and Tianqi of China from their immensely profitable Greenbushes mine in the south of WA, a business which is also expanding rapidly with the latest step being approval for a lithium hydroxide plant which will take the refining process to an almost finished stage for battery production.
Pilbara Minerals has a long way to go before it can plan the production of lithium hydroxide or another precursor stage in the lithium pipeline, lithium carbonate.
But it has moved up off the ground floor which was the export of the lowest grade of material, direct-shipping ore (DSO) which contains around 1.3% lithium and sells for about $US150 a tonne.
China, the biggest customer for lithium, didn’t like importing a material which was close to 99% rubbish.
That’s been a factor driving Pilbara Minerals and other lithium miners to upgrade their operations to the production of 6% lithium concentrate (sometimes called spodumene concentrate).
Pilbara is just starting to see the benefits of investing in a processing facility to produce a lithium concentrate which, in the case of the first shipment of 8800 tonnes exported from Port Hedland last month graded 6.223% lithium.
The difference between 1% and 6% lithium is enormous with the upgraded material that has been passed through a crushing and screening process attracting a price today of more than $US800/t.
Getting to market ahead of a pack of competitors is important for Pilbara because China’s battery sector is maturing with big producers being encouraged by government regulations and small producers discouraged.
In simple terms that means the supply pipeline into which Pilbara is delivering is being squeezed to filter out material such as DSO and producers not meeting specifications or not able to meet the tonnages forecast as the electric car business takes off.
One of the winners
Macquarie Bank reckons Pilbara Minerals will be one of the winners in the rush to deliver high-grade spodumene concentrate with profits soaring from next year as output moves towards the nameplate target for the first stage of 2m/t a year – and the up to 5m/t when the stage two expansion is on line.
In the current financial year to next June 30 Macquarie is tipping that Pilbara will generate revenue of $287 million and earnings before tax and other charges (EBIT) of $117 million – a very comfortable 41% profit margin.
As production grows, and assuming the lithium prices stays high, Pilbara could be generating EBIT of more than $400 million in the 2021 financial year – a substantial business by any measure.
Credit Suisse, another investment bank, is even more bullish about the outlook, tipping revenue of $900 million and EBIT of $492 million in 2021.
What Credit Suisse particularly liked is the fact the first shipment of concentrate was above the industry-standard benchmark which was: “a clear endorsement of the quality of the (Pilgangoora) deposit, plant design and process, and represents a major de-risking of the project.
The Pilbara share price, which is what investors follow more closely than ore grade and processing technicalities, has been trending down this year, sliding from a peak in January of $1.25 to latest sales at 84c, with much of that slide attributable to project completion risk – which is fast fading as production ramps up and shipments increase.
Credit Suisse sees Pilbara heading for a share price of $1.15, Macquarie sees $1.20 as the share-price target – two tips which imply a share price rise over the next 12-months of between 37% and 43%.