Is the ‘perfect storm’ coming for Pilbara Minerals?

Pilbara Minerals (ASX: PLS) is perhaps the poster child for the Australian lithium industry. The share price appreciation during the pandemic era, followed by the fall in line with the plunging spodumene concentrate price to $3.62, arguably makes the stock a bellwether for the wider industry.

In its recent Q4 activities report, the company saw sales increase by 9% to 159,900 tonnes of spodumene — though prices fell by 50% in the quarter-on-quarter to just $1,113 per tonne on a 5.2% basis — compared to $2,240 per tonne in the quarter prior.

But mining is cyclical — and CEO Dale Henderson remains resolutely positive.

Pilbara Minerals shares: the long game?

ASX lithium producers are struggling — the world’s largest mine, Greenbushes — is cutting back on production on falling demand. Core Lithium is now only processing stockpiles at Finniss. Liontown Resources is reducing expansionary plans by a third at Kathleen Valley. Piedmont has cut 27% of its workforce.

Wherever investors look, the story appears similar, and both national and state government are investigating royalty reliefs and production tax credits to keep the industry afloat.

But not at Pilbara, where CEO Dale Henderson is pressing on with its ‘P1000’ $560 million expansion to 1 million tonnes of production per annum at Pilgangoora, which is expected to be completed by the end of 2025.

Of course, Pilbara has the benefit of the $2.1 billion in cash it now holds in reserve, generated during the pandemic-era lithium price boom. But Henderson plans to defer its dividend rather than significantly cut capex, arguing that there may soon be a ‘perfect storm where pricing improves in combination with the new capacity that we’ve built out.’

The CEO further argues that Chinese customers remain ‘cautious in terms of the current outlook and the softer pricing… 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.’

For context, offtake partner Ganfeng has recently increased its contract from 160,000tpa of spodumene to up to 310,000tpa through to 2026. Meanwhile, Chengxin has upped its offtake to 85,000t in 2024, and then to 150,000t in both 2025 and 2026.

Where next for Pilbara Minerals?

Pilbara was recently hit with downgrades from both UBS and Citi based on reduced lithium pricing expectations over the next three years. It’s interesting to compare this perspective with the newly increased offtake agreements — it was the original lithium winter of 2019, when prices fell to half that of today — that saw new projects stall, causing the lithium price explosion and subsequent PLS share price rise.

History often rhymes, and minerals are often cyclical. ASX superannuation titan AustralianSuper has increased its position in the miner to over 153.36 million shares representing 5.1% of shares in issue. And while long-term demand for lithium may continue to increase with rising EV demand, it’s also worth noting the recent Chris Ellison and Gina Rinehart machinations over Liontown and Azure Minerals.

Pilbara’s acquisition of bankrupt neighbour Altura Mining and its attached plant helped propel the company forward after the 2019 lithium winter evaporated. While future mergers are not being actively planned, the company is highly capitalised, and many quality operations are not currently able to function profitably — which is an interesting position to be in.

Longer-term, Pilbara is at the whim of the lithium price. Goldman Sachs expects Spodumene Concentrate 6 (SC6) to average $1,250 per tonne in 2024 — slightly above current pricing. But longer-term, S&P Global estimates show lithium is expected to stabilise in 2025 as surpluses narrow, and then steadily rise.

Of course, few called the pandemic era boom — and a similar production gap may be starting to emerge sooner.

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