I have no real idea where the share price of Pilbara will go, particularly in the short term. But the following sets out why I have recently added to my investment in Pilbara Minerals. My thinking is all based on where the business and its valuation might go over the next few years, rather than the next few months.
Pilbara Minerals is a Lithium miner. It is really only and solely about lithium.(Don’t mention the tantalite at the Pilgan site, as it is largely immaterial to my thesis).
Diluted EPS
This is taken from the 2023 full year results
Production Cost & Capex
As production has increased dramatically at the Pilbara site the cost of producing a ton of spodumene has decreased significantly. Pretty standard economies of scale that as production continues to grow would, everything else being equal, be expected to continue to grow.
All miners require maintenance capex. And Pilbara is no exception. But Pilbara has agreed to two major investments in new production developments P680 and P1000. This means that in the short term there will be substantive investment required before the increased production from these initiatives arise. This is not only capex, but management made clear there is a need to invest in staff and skills in advance of any earnings flow. Until this leads to extra production this will potentially offset some/all of the future economies of scale
On top of this workers in Australia are increasingly looking for a bigger share of the pie. And Pilbara has a big pie.
In the short term I think there will be noticeable increases in production costs and capex/depreciation. But the company will return to a lower average cost as the production increases. Both possible scenarios are reflected in the valuation calculations.
Lithium Price
Lithium is not particularly rare or hard to find. There are large deposits around the world. But it is only recently that the demand for its use in batteries has moved from one day we will need it, to we need it now.
This relatively recent rise in the need for lithium in batteries couples with 2 other factors. Firstly Lithium mining or extraction (much lithium is extracted via a brine method) is not a “clean” activity. As such whenever a mine or brine process is proposed the green lobby acts to stop it. Clearly the more powerful the green lobby the longer any project takes to get approval. If in fact it can get approval. Most suggested projects in western nations do not get approval no matter that their development would be far greener than promoting projects in the third world. Secondly any mine or brine development takes years once the permits are in place. As this is a relatively new situation the amount of experienced lithium mine developers is limited. So planning and delivery before production can even begin is years. Whilst I have not been following lithium for that long it does seem that whatever date is first introduced for a working mine quickly becomes a date for a limited production run, quickly becomes a date that gets missed by 6-12 months.
As such, actual lithium available today is quite limited. It would be more so but lithium has been a coming metal for a while so a number of projects had been started years ago (Pilbara was founded in 2013) and are now live. This means that from 2027/28 most forecasts believe there is likely to be more demand than lithium supply for at least a few years.
Not everyone agrees with this; Goldman Sachs has been particularly positive on the potential for supply to grow quickly. (Though as they seem to be buying lithium assets I do wonder if this is just keep the price down till I have filled my position - Anyone seen the Big Short where GS cannot price Michael Burry’s position until they have their own book filled?)
And there may be quicker entrants to the market than expected - there are various high cost sites in China that will come on stream if prices rise and there are big deposits in Afghanistan the Chinese firms are reported to be looking at. And we can all be fairly sure that the green lobby is not going to be slowing the development of these. So instead of a 10 year development cycle perhaps these could be up in 5.
I tend to think that whilst in the short term lithium pricing will be volatile between now and 2030 it will be trending up, though I reflect both a gain and a fall in my table.
We should also take into account that along with mining and brine there is much discussion about Direct Lithium Extraction. This seems to vary from company to company in meaning but it is in some quarters the current holy grail of lithium supply and if it really works might decrease the value of existing mines.
We also need to recognise that there are many substitute technologies that allow lower or nil use of lithium in batteries. At the moment these produce much less efficient batteries, but should a breakthrough be reached the main use case for lithium evaporates.
Margin Increase
Pilbara has invested in developing two added value opportunities. A joint venture with Posco to refine the ore into a higher value lithium product and a JV with Calix to refine in a new and more environmental way. I have some doubt as to the value of the Calix JV, but the Posco JV seems to be an easy and well understood way to move up the margin curve.
My high case scenario suggests that the Posco JV project works but Pilbara produces so much ore that most of it still sells to other parties and is already contracted to various parties for future supply. The Low case scenario assumes that both JV’s are nothing more than a drain of money and management attention.
Production Increase
Management state they are, with P680, P1000 and general operational improvements on the way to increasing production 70%. I think they may have sandbagged this a little and are already on the journey so in neither scenario do I use the 70% figure, but could equally go higher or lower.
Management also, at the last conference call, reflected on the increase in resource estimates. Which they said could reflect either a longer mine life (from 25-34 years) or higher production volumes should lithium prices justify.
We do need to be aware that China is still the main user of lithium. Should Chinese Australian relations worsen there is a possibility that China could ban or restrict the supply of product. In this case there is little point in increasing production. Though there is an increasing awareness in the west that by controlling so much of the battery supply chain China is making much of the margin. This may lead to alternative customers, though it may not as everyone wants the nice clean, high tech battery sites but not the base level refiners. Though without the refined product you do not get to the battery.
Multiple
You pays your money and you makes your guess. I think Pilbara by being a single commodity play is relatively simple to value. And should it continue with a steady delivery will command a high (for a miner PE). But to be fair anyone’s guess is as good as mine
AUS $ |
EPS 2023 |
Production Cost |
Lithium Price |
Margin Increase |
Production Increase |
Multiple |
Value |
High Case |
0.7893 |
*1.05 |
*1.2 |
*1.1 |
*1.6 |
*10 |
$17.5 |
Low Case |
0,7893 |
*0.85 |
*0.8 |
*0.95 |
*1.3 |
*6 |
$3.98 |
Other factors
On the premise that EV’s are not going away and on the premise that Lithium is going to be a key component in batteries for a while. Pilbara represents one of the largest opportunities in a stable country with the rule of law. If you were a major and you wanted a large lithium miner might Pilbara fit the bill? Having said that I would never suggest that anyone should buy for this reason. But if you have bought for other reasons it does not hurt.
Pilbara is listed in Australia on the ASX. That means it gets limited coverage in the UK or US and its value will rise and fall with The Australian Dollar. It also means that trading in its shares are for a UK resident at very odd hours.
Conclusion
I don’t think Pilbara is absolutely a slam dunk. One of my valuations, which is pessimistic is below the current value and neither valuation reflects the potential effect of terrible China - Australia geopolitical tension. As might be created by an invasion of Taiwan.
There is a strong possibility that almost all of the downside effects, higher staff costs, lower pricing, etc etc will happen at least to an extent in the next 12 months. The shares may therefore become, for a while, considerably cheaper.
But equally as possible I think is that over the next 24 months, as actions today prove out and we move nearer to supply shortages something more akin to the higher valuation could occur. Even putting in a real slug of MoS and devaluing down 30% to $12.25 there seems to be some fat on the goose.
Personally I hold and PILS is now one of my largest positions.