Ramp-Up Delay Hinders Pilbara Minerals

This story features PILBARA MINERALS LIMITED. For more info SHARE ANALYSIS: PLS

Pilbara Minerals is reducing its output of lithium from Pilgangoora to meet the requirements of its offtake partners as its refinery ramp-up is behind schedule.

-Broader market weakness as recently commissioned supply outpaces demand
-Poor market sentiment may reduce the value the company can realise from renegotiated contracts or a partial sell-down
-Demand still expected to build and a period of constrained supply should support lithium prices
 

By Eva Brocklehurst

Delayed commissioning and ramp up of a customer's conversion facilities has caused Pilbara Minerals ((PLS)) to re-evaluate its scheduling. The company is moderating its output from Pilgangoora up until the end of July and will use the period to accelerated its plant defect rectification program.

Refinery ramp-up is behind schedule, reflecting technical complexity rather than weak demand for high-purity lithium chemicals, Canaccord Genuity suggests. The company asserts spodumene offtake is slow because of a conversion capacity mismatch, rather than customers refusing to take more feedstock.

Negatives are principally market-driven, Credit Suisse asserts, believing the shortfall in sales volumes is indicative of broader market weakness as recently-commissioned supply is outpacing the rate at which demand is developing. Still, Pilbara Minerals is not alone. Across the lithium spectrum, the broker observes realised sales have fallen short of production and the spot market is insufficiently developed to take up the excess.

Given the softening outlook for prices, Canaccord Genuity suspects the company will be reluctant to place additional sales into the spot market. Citi cautions that weaker pricing for lithium chemicals could reduce the converters' appetite for expansion, nonetheless.

Pilbara Minerals has noted that 6% spodumene product now trades for between US$600-640/dmt. Pilgangoora produced 22,400dmt, or around 85% of nameplate, of spodumene concentrate during May, a site record. The company is assessing the diversification of its stage 1 sales to other parties, potentially to a stage 2 partner, Great Wall Motors, which has an interest in the new 25,000t lithium plant in Guanxi.

Pilbara Minerals has been engaged with industry participants rather than offtake partners with the aim of growing sales volumes, although remains confident current offtake partners will meet commitments once the plant conversion advances.

Outlook

Canaccord Genuity expects operations will break even over the June quarter. The company has guided to production of around 65,000t and 23-45,000t in sales in the quarter, a soft result given around 14,000t was shipped early. Macquarie assumes the company will ship at the top end of its guidance range with a similar level of production and shipments in the September quarter.

Pilbara Minerals has looked to sweeten its offer for a project sell-down of up to 49% by offering existing offtake that could be freed up under renegotiated contracts. While there is clear merit in partnering in a downstream strategy, Canaccord Genuity believes poor market sentiment could reduce the value the company can realise.

The broker does not expect the company will deal on stage 3 in the near term and because of this uncertainty has removed stage 3 from an assumed project development path. Canaccord Genuity, not one of the eight stockbrokers monitored daily on the FNArena database, has a Hold rating and $0.60 target.

The company expects a final investment decision on the proposed POSCO joint venture for the downstream conversion facility in South Korea in the September quarter, a potential catalyst in Citi's view.

Value

Credit Suisse remains firmly of the view that the high-quality and readily expandable Pilgangoora asset will mean it gets to be one of the leading global spodumene suppliers. Moreover, there is potential for the minority sale process to crystallise value in the September quarter above the traded equity value.

While maintaining a positive investment view, the broker acknowledges current market dynamics put its Outperform rating at risk for the near term. Nevertheless, there is opportunity for Pilbara Minerals to re-rate as it concludes its strategic partnering and sale process.

The company has indicated a high level of strategic interest from multiple parties that are conducting due diligence. While asset buyers are taking longer-term views versus the equity market, Credit Suisse assesses a sale process under a softening sales environment is unlikely to extract maximum value. Nevertheless it still offers compelling upside versus trading levels.

The broker also notes that recently commissioned supply has come from sanctioned and funded projects. There remains a dearth of financing for lithium juniors, which were poised to provide the next leg of supply to the market. As demand builds, the broker expects there will be a period of constrained supply and that will support lithium prices and, in line, lithium equity values. However, the prospect of when the market will turn is unclear.

FNArena's database shows two Buy ratings and one Sell (Ord Minnett, yet to comment on the update) for Pilbara Minerals. The consensus target is $0.90, signalling 47.5% upside to the last share price.

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