Production pullbacks by AU miners: The sharp drop in lithium...

Production pullbacks by AU miners: The sharp drop in lithium priceshas resulted in supply side responses, with multiple AU lithium producersannouncing output cuts and delays to green-field and brownfield projectsduring the recent quarterly/earnings update. On our estimate, revisionsfrom AU miners to date imply a ~150kt reduction of spodumene supplyin CY24. LTM delayed its brine projects in Argentina and hard rockdevelopment in Canada by 6-9 months, which could lead to a slowersupply growth in the medium term.
PLS was arguably the only AU lithiumproducer which didn't downgrade its near-term production guidance ordelay organic growth plans, underpinned by its competitive position onthe cost curve.
• Supply risks from lepidolite and Africa producers emerging: Accordingto media reports (SMM), environmental inspection works were underwayin Jiangxi, the lithium hub, last week. More importantly, all lepidolite,marginal volumes for lithium supply, are produced in that region. Thesupply uncertainty caused by environmental inspections could limitoperating rates and shift cost curve support in the near term. In addition,we believe the market could be over-optimistic on supply growth inAfrica. New project commissioning could be impacted by the severedrought in Zimbabwe (Kamativi), while ramp up could be challenged bymineralisation issues (Arcadia), in our view.
• End-use demand key to sustained price improvement: Our channelchecks with major batteries manufacturers and companies on thelithium supply chain indicated no substantial improvement in end-usedemand. Due to lithium's long value chain, an inventory build could havea disproportional impact on apparent upstream demand and lithiumprices in the near term. February inventory levels at refiners and cathodemakers would be key to watch.Key preferences
• PLS is our preferred producer with the most un-leveraged balance sheetin our AU lithium coverage universe, while we see value in LTM given itsrecent share-price underperformance. PMT remains our exploration pick.

PLS: is arguably the only lithium producer which didn't downgrade its near-termproduction guidance or delay organic growth plans, underpinned by competitiveposition on the cost curve. Its organic growth project remains underway, with P680crushing and ore-sorting facility under construction and P1000 works advancing. It isalso evaluating further growth opportunities to expand beyond 1mtpa. Managementbelieves that higher sales volumes could help to reduce unit costs and improve itscost competitiveness.
Key risks to earnings and valuation

Pilbara Minerals (PLS): Movements in spodumene prices that vary compared to ourforecasts present the key risk to our earnings estimates and valuation for PLS. Wealso make assumptions relating to production and costs for PLS’s Pilgan and Ngungaju projects, and variances in these outcomes vs our forecasts also present key risks to ourbase-case assumptions.