The lithium boom looks to be fading rapidly for the country’s major producer Pilbara Minerals, thanks to weakening prices in the vital Chinese battery market.
Judging by the tone of comments from Pilbara in its March quarterly report filed on Thursday evening, there are tougher times to come for the Australian sector over the rest of 2023.
But don’t tell its management – CEO Dale Henderson was out selling hard on Friday in briefings with the message that lithium’s boom will continue, even if there is a short slowdown.
Pilbara reckons the soft prices in the global lithium market will continue for a while yet – into the second half of this year before the possible start of a recovery.
Pilbara is Australia’s major lithium exporter and said in its quarterly that as a result of the changed conditions in the lithium market, it has started talks to make sure its pricing matches expectations from customers after the huge fall in lithium prices in the Chinese market in particular since last November.
Pilbara said on its quarterly that it “anticipates continued softening of spodumene prices into the June Quarter 2023 until pricing for lithium chemicals stabilises, including domestic pricing in China.”
“This is expected to continue in the short term with pricing potentially strengthening in the second half of this year as restocking of inventory levels in China occurs across the supply chain.
“As contemplated under the Company’s offtake agreements, price review discussions have commenced to ensure pricing aligns with prevailing market conditions which are expected to be concluded in the June Quarter,” the company told investors.
Possibly the only thing that could offset the short-term gloom is the way China is gearing up to export hundreds of thousands more electric vehicles this year and next (See separate story)
Depending on the pricing website, battery grade lithium prices are down upwards 65% and over 70% for industrial grade metal since their all-time highs last November (that’s for lithium hydroxide and lithium carbonate).
On top of this, the company saw a rise in cost pressures from labour shortages and higher energy charges in the quarter.
That saw the company’ lift its unit operating cost estimate for 2022-23 to $A600-$A640 a dry metric tonne (FOB Port Hedland) from $A580-$A610 a dry metric tonne (FOB Port Hedland ex royalties).
“The unit operating costs on an FOB basis for the period were elevated relative to the prior quarter due to reduced production volumes as a result of processing plant run-time and lithia recoveries. In addition, cost pressures remain in relation to labour shortages in the WA mining sector, supply chain disruptions and general inflation.
But there was some relief elsewhere on costs with Pilbara reporting “Unit operating costs on a CIF basis improved in the period as freight rates continued to decline and royalty costs decreased in line with the lower realised price for spodumene concentrate.”
While the company still saw a big jump in its cash holdings of $456.5 million in the quarter, that was well short of the $851.1 million added in the December quarter and nearly $784 million in the three months to September.
Still the smaller amount was enough to lift Pilbara’s cash balance to a huge $2.683 billion at March 31, compared with the $2.226 billon held at December 31.
The tone of the report and its key data indicates that Pilbara, like so many of its rivals, will be looking at a sharp reduction in sales revenue this quarter and next which will mean another fall in the amount of cash it is generating each quarter – that is already clear from the above figures for the last three quarters.
During the quarter, a total of 144,312 dry metric tonnes – dmt – (December Quarter: 148,627 dmt) of spodumene concentrate was shipped under both existing offtake agreements and through spot sales including a spot sale of 15,000 dmt based on a new pricing model “linked to tolling lithium hydroxide.”
Prices for spodumene concentrate and lithium chemicals fell 15% over the Quarter. “The average estimated realised sales price for spodumene concentrate for the Quarter was ~$US4,840/dmt (CIF China) based on ~5.3% product grade (December Quarter: ~$US5,668/dmt (CIF China) based on an average ~5.4% product grade),” Pilbara said.
“When adjusted pro-rata for actual lithia content, this represents a sales price of ~$US5,522/dmt (CIF China) on an SC6.0 equivalent basis for the Quarter (December Quarter: SC6.0 equivalent was ~$US6,273/dmt (CIF China).
“This average price does not include the value received for the 10,253 dmt of middlings product sold during the Quarter, which received an average realised price of $US360/dmt (CIF China),’ Pilbara said in its report.
Despite the weakening lithium prices, Pilbara still received more than a billion dollars in sales revenue in the quarter from customers -$1.093 billion to be exact, compared with $1.135 billion in the December 2022 quarter, a fall of just 3.3%. The March quarter figure was higher than the $1.035 billion received in the three months to last September.
(There’s no relevant comparison with the March, 2022 quarter when Pilbara was just starting to ramp up output of spodumene.)
Pilbara paid an inaugural interim dividend of 11 cents per share which absorbed $A330 million after an interim net profit of $A1.24 billion.
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Normally, gloomy comments about lithium would see a selloff (especially from broking analysts) but investors ignored Pilbara’s remarks and sent the shares up more than more than 7% to $4.24.
That left the shares up nearly 12% this week and a testimony to the belief investors have in the company and the sector in the face of what was a set of gloomy comments.
The reason for that rise was the way Pilbara management sold the downturn – a short term problem but long-term gains.
Speaking to shareholders and analysts early Friday, Pilbara Minerals CEO Dale Henderson said the company remains “very positive on the structural deficit for lithium”.
There were two major trends bolstering its bullishness last quarter: major investment in the sector and electric vehicle uptake, which stepped up in the US and Europe in the first quarter and was solid in China where that big export surge is warming up.
Henderson pointed to the long-term rise of EV sales in China and around the globe. He said it’s “the key consumption driver [of lithium] right now”.
Some analysts are wrongly gloomy about the slowing growth of EV sales in China now that most purchase subsidies have ended (though there are still some around on a local or provincial government basis).
There’s a big test in the next week to 10 days when the sales data for Chinese cars – especially new energy vehicles – emerge from the China Passenger Car Association.
Pilbara’s Henderson told the briefing that “Pilbara Minerals remains bullish on the at the long-term outlook for the market, and remains committed to our expansion and getting on with the job of developing this incredible tier 1 asset [the Pilgangoora Project] and enjoying, hopefully, strong margins from many quarters and many years to come.”
That confidence is why the share outperformed on Friday.
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There was no sign of Pilbara’s gloominess about the outlook for lithium pricing in IGO’s March quarter report, released Friday.
IGO’s lithium interests are complex – they are held via the Company’s 49% interest in Tianqi Lithium Energy Australia (TLEA), an incorporated joint venture with Chinese partner Tianqi Lithium Corporation (TLC) with 51%.
TLEA in turn owns an integrated lithium business, including a 51% interest in the Greenbushes mine in WA’s southwest (Albemarle has the other 49%), and 100% of the Kwinana Lithium Hydroxide Refinery.
It was the Greenbushes operation that powered IGO in the three months to March, even as production and prices eased.
As a result, IGO received a 30% boost in net profit from TLEA to a massive $450.1 million in the three months to March 31, thanks to a 45% jump in the quarter on quarter received price of spodumene produced from the mine.
The TLEA contribution boosted IGO’s underlying EBITDA to a record $533.2 million for the quarter, up 22% on the prior quarter.
Before that distribution, group sales fell 7% for the quarter to $235.7 million, thanks to lower nickel sales volumes at its Forrestania mine because of what it said was “low trucking availability.”
Group net profit after tax for the quarter jumped 22% to $412.3 million because of the higher return from TLEA (and the Greenbushes mine).
Cash on hand at the end of the quarter totalled $441.1M ($515.0 at the end of December before the payment of the record $106 million interim dividend), with net debt reduced to $8.9 million from $175 million at the end of December.
Looking ahead the company warned of a non-cash impairment “expected to be recognised in the June quarter for (nickel) assets acquired from Western Areas.”
IGO paid $1.3 billion for Western Areas and its nickel assets but the size of the write down was not revealed by IGO on Friday.
“As required by accounting standards, IGO is in the process of completing the purchase price allocation (PPA) relating to the acquisition of Western Areas in June 2022, whereby the purchase price is allocated to the assets and liabilities acquired at fair value, as at the acquisition date, in IGO’s balance sheet.
“While this process remains incomplete, IGO anticipates a non-cash impairment charge will be recognised on the assets acquired in the Company’s FY23 financial statements as at 30 June 2023.
“IGO is not currently in a position to accurately quantify the probable impairment value nor a range of values with reasonable certainty, given the first full annual life of mine (LOM) budget process is due to be completed during the June 2023 quarter and any impairment recognised will be heavily dependent on that budget process and macroeconomic inputs at the date of testing.”
Looking at the lithium business, tonnage, costs and price rose from Greenbushes in the quarter, according to IGO – the price rise was in contrast to the experience of Pilbara Minerals.
IGO said quarterly spodumene concentrate production at Greenbushes was 355,809 tonnes including 28,305 tonnes of technical grade and 327,504 tonnes of chemical grade spodumene. Production was lower quarter on quarter.
“As guided in the previous quarter, Unit COGS (cost of goods sold excluding royalties) of $292 a tonne, up 11% higher from the prior quarter, reflecting cost escalations anticipated to impact cash costs from 3Q23 as foreshadowed in the December 2022 quarterly report.
IGO said Greenbushes recorded 3Q23 sales revenue of $2.8 billion, up 23% over the second quarter of 2023.
“Whilst overall spodumene sales volumes were 13% lower, 3Q23 sales benefitted from higher QoQ contract spodumene prices and a favourable sales mix in respect of higher grade spodumene compared with the prior quarter.”
“The average realised price for total spodumene sales (chemical and technical grade) during the March Quarter increased 45% to $US5,783 tonne FOB Australia (December quarter: $US3,984 a tonne FOB).
At TLEA’s 100% owned lithium hydroxide refinery south of Perth, the production ramp-up at Train 1 “continued to progress positively in 3Q23, with plant performance improving steadily and new production records being achieved across daily, weekly and fortnightly measures during the Quarter. A total of 963 tonnes of lithium hydroxide was produced, a 65% increase QoQ and 16% of nameplate capacity.”
In its nickel business, IGO said that during the quarter, it sold blended Nova and Forrestania nickel product to BHP under a short-term contract, achieving higher value.
“Under an extension to existing rights, IGO is finalising an offtake agreement for blended Nova and Forrestania product to the end of CY23. Commercial terms are agreed with improved payabilities and this crystallises the benefits of lower penalties and more by-product value until the end of CY23.”
Group nickel production rose 16% quarter on quarter to 8,358 tonnes (a year-on-year comparison is not valid because the Western Areas takeover only closed in June, 2022).
IGO shares rose 2% on Friday, beating the wider market 0.23% gain.
