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Every body wants a pieceof Pilg

Lithium batteries arein hot demand. Can miner Pilbara keep on trucking?

Lithium, the soft, silvery-whitemetal at the heart of the clean energy shift, is in hot demand these days.

As a key ingredient in lithium-ionbatteries, securing vastly greater supplies of the commodity is essential forpowering a growing global fleet of electric cars and storing renewable energyto feed the grid when the wind isn’t blowing and the sun isn’t shining.

But in the minerals-rich outback ofWestern Australia, home to more than 20 per cent of the world’s known lithium,the companies developing the next generation of mines to meet expectations ofbooming demand have endured a tumultuous few years.

It’s been a rollercoaster,” saysDale Henderson, the chief executive of ASX-listed Pilbara Minerals – “arollercoaster that Pilbara has enjoyed with white knuckles, holding on for dearlife”.

There is little doubt that the world will needmuch more lithium than it has right now. Electric car sales are rising rapidly.Carmakers are expanding their electric vehicle lines. All around the world,governments are signing up to increasingly ambitious emissions-reductiontargets, and some are setting deadlines to phase out combustion-engine carsaltogether.

All told, global lithium supplies may need tolift as much as six-fold between now and 2030, some analysts say

The last time things looked thisbright for lithium, when prices tripled from 2015 as the electric vehiclerevolution began to dawn, the small and highly speculative market went fromboom to bust. A rush of new mines came on too soon, tipping the sector intooversupply. Cuts to Chinese electric car subsidy programs stalled demand.

By 2019-2020, many lithium mineshad been slowed or mothballed, there were large-scale lay-offs, and somecompanies went into administration.

Pilbara Minerals, one of the ASX’stop producers of lithium found in hard rocks, calls this period the “lithiumwinter”.

“It was cold, bitter and just keptgoing,” Henderson told the Melbourne Mining Club last month. Production had tobe temporarily suspended at the company’s flagship Pilgangoora mine, south ofPort Hedland. Demand was so thin that management installed a bell at the officeto ring when they landed a sale, and alert the site team to turn the plant backon.

But three years is a long timein the resources sector – long enough for fortunes to dramatically change.Pilbara Minerals’ bell began ringing much more frequently as dwindling global supplies collided withmuch-stronger-than-expected increases in demand for electric cars, not only inChina, but in the US and Europe, too. The company’s stock price has soared 1500per cent, from 30¢ in 2020 to as high as $5 earlier this year

With amarket value of $15 billion, Pilbara Minerals in December joined the ranks of the nation’s 50 biggestlisted companies, the S&P/ASX50. Last month, it posted a stunning half-year profit rise of 989 per cent to $1.2 billion, and it declared its first-ever dividend.

Henderson and others now insist that lithiumdemand is structurally different from what it was in 2019 – less reliant juston China, more diversified and much less volatile.

“For the investors out there who worry, ‘Gee,will 2019-20 happen again?’ I can’t say ‘no’ and I can’t say ‘never’, but whatI point out is the structural demand,” he says.

Some analysts believe lithium prices willcontinue receiving “strong support” in 2023 and beyond amid expectations of anongoing supply crunch. Others, however, are cautioning that 2023 could seelithium pricing reach an “inflection” point as higher prices spark new suppliesbut slower demand.

Already, the price of lithium inChina has come off significantly since the start of the year, causingconsiderable investor unease. Pilbara Minerals’ share price has dropped 15 percent since its peak in November.

So, what now lies ahead for Pilbara Minerals?Have lithium prices hit their ceiling, or could the wonder metal’s meteoricrise continue? And what might it all mean for the company’s ability to keepgenerating strong profits and returns?

Industry: Mining.

Main products: Lithiumspodumene, tantalite concentrate.

Key figures: Chiefexecutive Dale Henderson, chairman Anthony Kiernan.

How it started: Founded by agroup of geologists including Neil Biddle and John Young, who had all been atuniversity together at the Western Australian Institute of Technology in the1980s, Pilbara Minerals acquired the Pilgangoora project in 2014.

At first, the company was developing what itthought would be a mine focused on tantalum, a corrosion-resistant metalvaluable for its use in electronics. However, by 2015, it was apparent that thesite’s deposits of lithium would be most sought-after amid the rise oflithium-ion batteries and intensifying concerns of a looming severe globalundersupply. From 2015 to 2018, lithium prices almost tripled.

How it’s going: Pilgangoorabegan its first lithium production in 2018, just in time for the “lithium winter”.From there, Pilbara Minerals CEO Henderson recalls, it was a fight forsurvival, with a focus on defending the company’s balance sheet and preservingit to emerge on the other side.

There were redundancy rounds andits mining contractors were temporarily stood down. Ultimately, though, itweathered the storm, unlike some, including Pilgangoora’s neighbouring lithiumminer, Altura Resources, which went into receivership in 2020

Towards the end of that year,Pilbara Minerals struck a $US175 million deal to buy Altura’s assets, giving itownership of the largest independent hard-rock lithium complex in the world.From 2021 onwards, the market truly began to turn, and Pilbara Minerals hasbeen in “ramp-up” mode ever since, investing in projects to boost Pilgangoora’sproduction capacity towards its aim of reaching 1 million tonnes a year.

In the December half, production hit 309,225 drymetric tonnes of spodumene (hard-rock lithium) concentrate, an increase of 83per cent from the same time a year earlier. Its average sales price was $US4993per dry metric tonne, up 305 per cent.

The bull case: The speed ofelectric vehicle uptake since 2021 has beaten most analysts’ forecasts. Despitea weakening in global economic conditions, sales and production of electricvehicles continued their rapid growth trend, according to the federalgovernment’s latest trade report.

Global sales of all types of EVsincreased 40 per cent in the nine months to September 2022 compared with thesame period in 2022, with Chinese sales up 110 per cent, European sales up 6per cent and North American sales up 27 per cent,” the report said.

A supply gap is forecast to persist in comingyears, it added, with global lithium supplies from both hard-rock and brineoperations remaining insufficient to meet demand.

Even if lithium prices come under pressure inthe near term because of oversupply concerns, the outlook may still remainrobust. For the world to meet countries’ existing decarbonisation pledges, theInternational Energy Agency has calculated that demand for lithium willincrease six-fold by 2030, requiring the equivalent of 50 new average-sizedmines.

As well, Pilbara Minerals is accelerating plansto seize a greater share of the electric battery raw material value chain,moving beyond simply producing lithium concentrate and into potentially morelucrative areas. Under a partnership with sustainable technology company Calix,it aims to upgrade the spodumene from its Pilgangoora mine through a refiningprocess at the site. It has also reached a deal with South Korea’s POSCO todevelop a 43,000-tonne facility in Gwangyang to produce battery-ready lithiumhydroxide.

Barrenjoey analyst Glyn Lawcock describedPilbara Minerals’ latest financial results as a “clean set of numbers”, notingthat it appeared on its way to becoming a more reliable and mature performer.

The bear case: Lithiumprices have already retreated 30 per cent since the start of the year, owing touncertainty in Chinese demand for electric vehicles and discounts being offeredby China’s largest battery manufacturer, CATL, to some Chinese automakers,which could put added pressure on the lithium price. Citi Research analystsbelieve prices will trade “higher for longer” relative to historical levels,but last week downgraded their 12-month outlook as downside risks appear to beincreasing.

“Investors remain concerned about the prospectsfor electric vehicle demand in China, especially after the country endedsubsidies for electric vehicle purchases at the beginning of the year,” Citisaid. Weaker electric vehicle sales for January 2023 had exacerbated thesituation, they added, driving destocking by battery and cathode producers ofinventory accumulated over the last two years. “We believe the bear run inlithium prices is likely to continue for a few more weeks before stabilising.”

A longer-term risk for lithium prices andproducers is the possible rise of sodium-ion battery technology, which usescheaper raw materials and could be an alternative to lithium-ion batteries.Sodium-ion batteries have lower energy density than lithium-ion batteries, but arefaster to charge and perform better in cold temperatures. In February, HinaBattery and Sehol — a joint venture brand between JAC and Volkswagen Anhui —unveiled a test vehicle powered by sodium-ion batteries, while other majorbattery players have announced plans to produce sodium-ion batteries from thisyear.

“This announcement raises the possibility of anaccelerated adoption of the battery technology in passenger vehicles,” Citisaid. “We believe there is scope for sodium-ion batteries to start garnering asmall share of China battery demand from 2025 onwards.”