Pilbara Minerals boss Dale Henderson is investing against the lithium downturn as he waits for the ‘perfect storm’

Pilbara Minerals keeps faith in growth plans as lithium prices fall
Benchmark Mineral Intelligence analyst Cameron Perks says soft lithium prices will cause deficits sooner as investment in new supply wanes
Project developers are reviewing studies to bring down costs in response to market conditions

The head of one of Australia’s biggest lithium companies is looking through the gloom, saying it will keep up the pace of its investments in the hope of capturing the ‘perfect storm’ of higher production when prices of the battery metal recover.

Speaking at the opening leg of the Benchmark Mineral Intelligence World Tour yesterday in Perth, Pilbara Minerals (ASX:PLS) managing director Dale Henderson said the lithium giant responsible for 7% of global supply would stay the course on a $560 million expansion to a million tonnes per annum at its Pilgangoora mine in the Pilbara.

Australia’s battery metals sector has suffered a month from hell, with so far 40,000t of nickel supply set to be suspended for the loss of hundreds of jobs and at least four lithium projects subject to austerity measures, with prices for the EV metals sliding 42% and 88% respectively last year.

It was so severe the spate of mine closures prompted crisis talks with the Federal and WA Governments last week which saw royalty relief and production tax credits for refining operations put on the table to soothe the industry’s woes.

And yesterday even the world’s largest, highest grade and lowest cost lithium mine was revealed to be cutting back production, with part-owner IGO (ASX:IGO) reducing guidance from the Greenbushes mine in WA’s South West from 1.4-1.5Mt to 1.3-1.4Mt for this year due to lower demand from its co-owners and offtakers.

It came after Core Lithium (ASX:CXO) announced it would only process stockpiles at its struggling Finniss mine in the NT, Liontown Resources (ASX:LTR) cut plans to expand its mining capacity by 33% at its new Kathleen Valley mine after losing a debt package and Albemarle cut plans to build a fourth processing train at its Kemerton lithium refinery.

But Henderson sees the opportunity to expand production and reduce costs in preparation for the next lithium boom, with its ‘P1000’ project to be complete late next year.

Instead PLS announced last week the company would likely defer its dividend and trim capex around the margins but keep its growth projects intact.

“Who knows where pricing goes, but I like the idea of a perfect storm where pricing improves in combination with the new capacity that we’ve built out. Time will tell,” he said yesterday.

Incredible growth rate

Much of the focus in lithium has been on the rise in supply from higher cost sources in China and Africa which has seen lithium tonnes run ahead of EV growth rates, with sales up 31% last year even as lithium chemical prices tumbled from over US$80,000/t to the mid US$10,000s.

They’ve fallen even further since, with the 6% Li2O benchmark for product sold by WA’s hard rock producers like Pilbara down from over US$8000/t to US$850/t in the same period.

At the same time, larger lower cost operators like Pilbara and Mineral Resources (ASX:MIN) say they are still turning a profit at current prices, which are double the lows seen in the 2019-2020 ‘Lithium Winter’.

A slowdown in investments in those years led to a period of undersupply which created the environment for 2022’s manic price explosion.

And long term demand projections remain bullish, suggesting deficits will return.

Benchmark estimates around US$582 billion of investment is needed to build the supply chain to hit growth forecasts for lithium ion battery capacity of 8000GWh by 2040 — 11 times the current energy storage and electric transport market.

Facing a narrative of a ‘slowdown’ in demand for EVs, especially in economically challenged China, Henderson said the 31% EV growth rate was “very, very positive”.

“As we look to the year ahead, most (forecasts) are estimating another 24% increase on EVs alone, so by any measure, any other market, that’s an incredible growth rate even it’s somewhat tempered at this time,” he said.

Henderson said the volume of measures across the West to fund downstream capacity was also a positive sign of what was to come, with demand from its customers suggesting their long-term outlook for the market remains strong.

“Last quarter I did a couple of trips to China, a trip to Korea and what was really positive through all of that engagement across all of our customers is … they’re cautious in terms of the current outlook and the softer pricing. Of course they would be,” he said.

“But they’re all very strongly convicted on the long term outlook, and all of them in one way, shape or form are continuing to build and continuing to ask Pilbara for more supply, both larger volumes and longer term.”

PLS notably announced it would increase contracted supplies to China’s Ganfeng for the next three years in an update this month.

Lithium deficit should be brought forward: Benchmark

With supply already coming out of the market at current prices, the outlook for new sources expected to arrive in the coming years is already looking muddier.

Benchmark principal analyst Cameron Perks said BMI had always viewed 2024 as a ‘balanced market’, adding that the current weakness in lithium prices would bring forward deficits expected later this decade.

“We were forecasting a number of new projects from Africa, Jiangxi, but also expansions from brownfields projects to come online in 2024,” he said.

“But what we were always saying to is that new projects are needed … without these possible and probable projects, those that are not funded yet, you can see the large gap if those projects are not actually brought into production.

“Now what we’re seeing is with lower prices and less interest in investing in these projects, financing these projects.

“We’ve already seen a very quick reaction to low prices in this market. And you’ll see in our Q1 update a shortening of this surplus period and we’ll be entering a deficit period a lot sooner than what we were forecasting in the last quarter, just three months ago.

“So we do need new projects and we do need them to be continually be developing, it’s just that they won’t be during this price cycle and those …. high quality projects and management teams that do so will be the ones in a great position when prices once again turn around and they will.”

Still early days yet

The collapse in lithium prices has arguably soured the market for development and pre-development lithium stocks, which face a struggle to access capital in a weaker pricing environment.

Unlike Pilbara, which is sitting on an enviable war chest of $2.1 billion, they will be reliant on the support of financiers to get their projects off the ground.

But many, like Canadian developer Green Technology Metals (ASX:GT1) executive director Cameron Henry, said it remains early in the electric vehicle revolution.

“We are still in the early throes of the EV boom,” he told delegates at the ANZAC Club.

“We still think that demand is going to be very strong and … with the supply and demand curve there’s certainly going to be a shortage in the future.”

GT1 has an offtake deal already with LG Energy Solutions, one of Korea’s largest battery producers.

It has run the numbers on a 207,000tpa spodumene operation out of Seymour, where it has anticipated making a decision to mine as soon as this year.

That would open in 2025, with a proposed refinery in nearby Thunder Bay to follow in 2028 and a larger, longer life spodumene project at the Root deposit in the west of its Ontario tenure slated to be brought into production by the end of the decade.

Prices have shifted downward since a preliminary economic assessment released in early December, something which could delay its path to market.

But Henry said GT1 was optimising the project’s mine plan in a bid to deliver lower costs that would help it ride out the cycles.

“We’re certainly looking at delivering a DFS this year on Seymour, along with permitting, a financial investment decision and actually starting construction depending on market conditions,” Henry said.

“We’re (at C1 costs of) about US$741/t, we certainly think we can bring that down to well within the low US$600s with an optimised mine plan development we’re looking at.”

Green Technology Metals (ASX:GT1) share price today

M&A still on the backburner for Pilbara

Pilbara Minerals remained on the sidelines while WA’s lithium hungry billionaires Gina Rinehart and Chris Ellison battled it out with internationals Albemarle and SQM in premium prices M&A last year over Liontown Resources and Azure Minerals (ASX:AZS) which arguably signalled the peak of the cycle.

Now valuations have come off at the junior end of the market.

Will that bring cashed up, bargain hunting majors out of the woodworks to make some cut-price acquisitions?

Pilbara Minerals doesn’t have to go far searching for inspiration to see how to do M&A in a downturn.

It’s biggest and best deal came when it picked collapsed neighbour Altura Mining from the bones of administration.

Having scaled back itself in the ‘Lithium Winter’ to just 91,000t of production, running only 30% of the time and after two rounds of redundancies, the acquisition of Altura and its Ngangaju plant helped propel the company to become the 600,000tpa $10 billion player we know today.

But Henderson has been clear about M&A being the most remote of the company’s four strategic objectives, behind operational improvement, resource growth at Pilgangoora and entering the downstream processing sector.

He reiterated that stance yesterday.

“Of course we’ll give it consideration but it’s genuinely not high up the list,” Henderson said.

“And one of the factors we’re very cognisant of is just the draw on the internal capacity the business currently with a 70% capacity build right now there’s a lot going on within the business to navigate.

“So that remains the priority but that being said, we’ve certainly got an eye out for the accretive transaction if and when it comes along.”

Pilbara Minerals (ASX:PLS) share price today

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