Today we’ll look at why we think Pilbara Minerals shares (ASX:PLS) has good upside potential in our PLS share price forecast and analysis.
Pilbara Minerals Ltd (ASX: PLS) is one of the largest pure-play lithium producers with roughly 8% of global production. After a fabulous acquisition of Altura Mining, the company currently owns one of the best operational lithium assets globally at Pilgangoora. Since the acquisition, the company has largely focussed on execution, expansion, and capturing more of the value chain. Recent financial performance has been stellar, showcasing the company’s frugal cost structure and opening of global markets for spodumene. Investors were also awarded an inaugural dividend in 1H’23.
The lithium market has been budding with activity, showing clear signs that the global economy and major corporations are betting big on its prospects. Chile recently nationalized lithium assets, Allkem and Livent entered a merger to become a major player in the sector while Albemarle failed to secure Liontown Resources despite a multi-billion dollar bid. Major carmakers are upping the ante with LG, Ford, and BMW announcing major battery production facilities while GM invested $650M in Lithium Americas.
Despite the slight weakness in lithium prices, Chinese economic weakness, and contractionary macro environment, the company has largely held steady and weathered the storm with record financial performance. At the current PLS share price, Pilbara Minerals shares (ASX:PLS) has returned 28.45% YTD against the ASX200’s paltry 2.80%.
Table of Contents [hide]
- 1 About Pilbara Minerals Shares (ASX:PLS)
- 2 Solid Outlook With Operating Leverage
- 3 Single Product Portfolio Is A Weakness for Pilbara Minerals shares (ASX:PLS)
- 4 Value-Added Opportunity Can Boost Earnings Tremendously
- 5 Tail Risk of Supply Shocks and Recession are Threats
- 6 Business is Maturing With Dividends and Operating Leverage is Kicking In Hard
- 7 Pilbara Minerals Shares (ASX:PLS) Valuation
- 8 Pilbara Minerals Well Placed to Cash In
About Pilbara Minerals Shares (ASX:PLS)
Pilbara is an Australia-headquartered company engaged in lithium mining. The company owns two mines in West Australia’s Pilgangoora region. The company’s primary product is lithium spodumene and it is aggressively gravitating towards a downstream value-added strategy.
Lithium spodumene, the natural hard rock ore of lithium is the raw material for processed forms of the metal that go into batteries. Pilbara is on the cusp of completing its P680 expansion program which will bring capacity to 680ktpa by September ‘23 (Q1 2024). It has also recently approved its P1000 expansion which will bring production to 1M mtpa by Q3 FY25.
Source – Pilbara Minerals 1H Results
At the current PLS share price, Pilbara Minerals shares (ASX:PLS) currently have a market cap of A$13.94B.
Solid Outlook With Operating Leverage
Pilbara’s strategy at present revolves around solid execution, downstream value addition, ramping up the current asset base to full capacity, and diversifying its asset base.
Source – Pilbara Minerals 1H Results
The primary advantage of Pilbara Minerals (ASX:PLS) lies in the promising outlook for its primary resource, lithium spodumene. In recent years, a combination of factors, including advancements in electric vehicles and increased environmental consciousness, has sparked a bull run for lithium. Lithium, renowned for its high energy density, plays a pivotal role as a crucial component in electric vehicles and electronic batteries. Over the next few years, experts claim that lithium demand will almost certainly lag its supply, leading to a substantial price increase. It is expected that lithium production will lag the demand base case by 2.6Mt by 2040, representing a huge opportunity for the company.
Source – Pilbara Minerals 1H Results
It must be noted that the EV trend is here to stay as consumers have shown no inhibitions to adopting the new technology. This can be seen in 25% YoY EV sales growth in China despite a downturn and EV models such as the Tesla Model Y/3 becoming overall best-selling models in various regions. Economies of scale are also kicking in as the starting price of the Tesla Model Y is now below the average new car price in the US.
The rapidly growing energy storage sector is a major growth driver for Pilbara Minerals (ASX:PLS) as renewable sources have largely reached cost competitiveness with fossils. The only Achilles heel for renewables such as solar lies in storage. Chinese suppliers of solar panels such as Longi (the world’s largest) have entered a brutal price war with a 31% cut in prices earlier this this week as silicon prices corrected. This is matched by a rapid increase in solar supply chain production capacity, driving prices even lower. As solar becomes more affordable, the value proposition of battery-backed solar parks becomes more viable at the grid level and at the residential level, which could open the floodgates on stationary battery pack demand.
A high-demand scarce commodity combined with a high-quality asset base is a boon for a company like Pilbara due to the massive operating leverage built into the business. At prices of US$4840/ton for spodumene in 1H’23, the company incurred an all-in operating cost of just US$747/ton (A$1,144/ton), highlighting massive operating leverage at higher prices. Realized prices are expected to improve substantially over the next few quarters as the Chinese economy exits its slowdown.
Further, lithium prices were hit hard over the past few months in China due to the heavy discounting of ICE vehicles held in inventory to meet new emissions standards that come into effect in July. At the same time, costs are coming down for the company as freight rates continue to normalize sharply while economies of scale from new production coming online push unit costs lower for the company.
Pilbara Minerals (ASX:PLS) had a significant chunk of initial pre-acquisition production in off-take contracts with major battery manufacturers and refiners in China and other Asian markets such as Gangfeng, General Lithium, POSCO, and CATL, thus giving it some stable demand in down cycles.
Single Product Portfolio Is A Weakness for Pilbara Minerals shares (ASX:PLS)
One of the biggest weaknesses of Australian lithium companies was the overconcentration of the lithium supply chain in China. However, this is now changing rapidly as major economies such as the US and Canada are now heavily incentivizing clean energy and materials supply chains. For example, Pilbara will be a major beneficiary of the US Inflation Reduction Act which includes nearly US$400B in incentives for clean energy transition providers in the US and those from free trade partners such as Australia. This can be a big strength for the company as there is currently a big divergence between China’s lithium prices and global prices. The development of domestic supply chains in other countries will lead to bigger markets and more pricing power for big producers such as Pilbara, at least in the medium term until supply grows substantially.
