Pilbara Minerals shares: where next after mixed quarterly results?

Despite some serious volatility, Pilbara Minerals (ASX: PLS) shares are up 23% over the past month, 74% over the past year, and 435% over the past five years to AU$4.55 today. And while the ASX 200 lithium trailblazer remains some way off its record AU$5.66 it achieved in Q4 2022, there is room for further growth.

Partially, this is because buyout fever is in the air.

BHP’s takeover of Oz Minerals, Glencore’s pursuit of Teck, and the likely Newmont-Newcrest tie-up are just the start. There’s also Albemarle’s AU$5.5 billion rejected bid for Liontown to consider, and the recently agreed merger between Allkem and Livent Corp to create a US$10.6 billion titan of the lithium industry.

This consolidation is simple to understand — inflation has sent mining costs soaring, there is a growing global critical minerals supply gap, ever fewer quality metal deposits, and the cyclical nature of mining means that larger companies need to adapt to ensure growth through the next phase.

Pilbara Minerals shares: quarterly update

After exceptional half-year results earlier this year left the company with $2.2 billion in cash, April’s quarterly update seems to have tempered expectations — after Pilbara reported a 9% quarter-over-quarter fall in spodumene production to 148,131 dry metric tonnes (dmt).

While this decline was very close to market expectations, the bigger problem was shipments — with deliveries down 3% quarter-over-quarter to 144,312dmt — short of analyst expectations of 161,000dmt and a far cry from Goldman Sachs’ optimistic prediction of 170,000dmt.

Pilbara, like all miners in the space, is battling two fronts. On one hand, it saw a 9.15% quarter-over-quarter increase in unit operating costs to AU$632 per dmt, reflecting general labour shortages, ongoing supply chain disruption, reduced production, and just regular inflation. Overall, the ASX lithium company expects FY23 unit operating cost to be between $600/dmt and $640/dmt.

On the other, the company saw its ‘average estimated realised spodumene concentrate sales price’ fall by 15% quarter-over-quarter to circa US$4,840/dmt on a ~SC5.3 basis. While analysts had been expecting prices achieved to fall in line with the softer market, the company also warned that further price falls would be likely ‘until pricing for lithium chemicals stabilises, including domestic pricing in China.’

Positively, PLS does see lithium ‘potentially strengthening in the second half of this year as restocking of inventory levels in China occurs across the supply chain,’ likely driven at least partially by falling battery stocks at CATL.

It’s worth noting that despite the mixed results, Pilbara still increased its cash balance from the previous pile of AU$2.2 billion to close to AU$2.7 billion.

Where next for Pilbara Minerals?

It was only a few months ago that PLS delivered it maiden, fully franked dividend of AU$0.11 per share. However, Morgans analysts are predicting a fully franked AU$0.15 per share dividend for the full year, meaning only 4 cents are left to be paid out. Worse, they expect weaker lithium prices to see next year’s dividend cut to just AU$0.09 per share — though admit that this is prediction is made with weak conviction given the unpredictable nature of Chinese demand through FY24.

CEO Dale Henderson consider that major investment in the sector combined with a drive for the EV revolution leaves Pilbara ‘very positive on the structural deficit for lithium.’ Despite weaker present prices, there is a clear and growing supply gap that could see prices resurge in the medium to longer term, with the CEO pointing out that rising EV sales in China is the ‘key consumption driver right now.’

While falling Chinese EV subsidies have weighed on lithium demand, Morgan Stanley commodities analyst Marius van Straaten thinks that a ‘turning point’ might have been reached as ‘sentiment is clearly improving, and their (Chinese) lithium inventories appear to have eroded.’

Pilbara’s share price, dividend, and trajectory may soon follow suit.

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