As a low-cost and long-life spodumene producer (spodumene is a raw material used to produce lithium for batteries in your phone, e-bike and electric vehicles (EVs), Pilbara Minerals (ASX:PLS) is one of the highest quality single commodity miners on the ASX. The share price has been punished recently, with the spodumene price falling from over U.S.$8,000 per tonne to below U.S.$1,000 per tonne in just over 12 months.
This was driven by slowing demand as governments around the world wound back their subsidies for EVs, and the higher cost of living began to take a toll on consumers. A large oversupply had emerged as commodity producers ramped up supply, a logical response to high spodumene prices that were far above production costs for even the newest and most inefficient operators.
Given the tough operating environment, Pilbara Minerals management behaviour has showcased a measured and conservative approach to surviving the price cycle. The company has a strong net cash position of over $1.5 billion, built up from high prices in previous years and prudent deployment of capital. With cash costs of production of AU$691 per tonne, the company has been able to maintain profitable operations throughout this difficult period as higher-cost rivals suspend or close operations to reduce cash burn.
The company’s production expansion projects, P680 and P1000, are well progressed and have a two-fold effect. Increased production volume will go some way in offsetting falls in realised price, while increasing economies of scale decrease the unit cost of production per tonne. Current annual production is 620kt and will increase 60 per cent to 1 million tonnes beyond FY25.
The company has also partnered up for mid-stream and downstream projects, which have the potential to increase future returns to shareholders. A mid-stream joint venture operation with Calix Ltd, an environmental technology company, is progressing with the objective of decarbonising the processing of spodumene. A large South Korean steel company, POSCO, is the downstream project partner that has started the commissioning of a lithium hydroxide plant, producing the finished product used in batteries and EVs.
With such strong fundamentals providing solid downside protection while simultaneously setting a platform for significant upside, the Australian Eagle Asset Management team have gradually built up a position in Pilbara Minerals in the past few months. As the most shorted stock on the ASX, the share price could rise significantly when the spodumene price inevitably recovers, forcing short sellers to close their positions.
While the team cannot claim any expertise in forecasting spodumene prices, we remain confident, given its current strong balance sheet and low cost of production, that Pilbara Minerals will be one of the long-term winners of the future as the world moves away from fossil fuels and accelerates towards renewable energy.
The Montgomery Fund and the Montgomery [Private] Fund owns shares in Pilbara Minerals. This blog was prepared 18 March 2024 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Pilbara Minerals, you should seek financial advice