Pilbara Minerals: the ASX’s most shorted stock, yet poised for long-term success?
As a low-cost and long-life spodumene producer (spodumene is a raw material used to produce lithium for batteries in your phone, e-bike and electric vehicles (EVs), Pilbara Minerals (ASX:PLS) is one of the highest quality single commodity miners on the ASX. The share price has been punished recently, with the spodumene price falling from over U.S.$8,000 per tonne to below U.S.$1,000 per tonne in just over 12 months.
This was driven by slowing demand as governments around the world wound back their subsidies for EVs, and the higher cost of living began to take a toll on consumers. A large oversupply had emerged as commodity producers ramped up supply, a logical response to high spodumene prices that were far above production costs for even the newest and most inefficient operators.
Given the tough operating environment, Pilbara Minerals management behaviour has showcased a measured and conservative approach to surviving the price cycle. The company has a strong net cash position of over $1.5 billion, built up from high prices in previous years and prudent deployment of capital. With cash costs of production of AU$691 per tonne, the company has been able to maintain profitable operations throughout this difficult period as higher-cost rivals suspend or close operations to reduce cash burn.
The company’s production expansion projects, P680 and P1000, are well progressed and have a two-fold effect. Increased production volume will go some way in offsetting falls in realised price, while increasing economies of scale decrease the unit cost of production per tonne. Current annual production is 620kt and will increase 60 per cent to 1 million tonnes beyond FY25.
The company has also partnered up for mid-stream and downstream projects, which have the potential to increase future returns to shareholders. A mid-stream joint venture operation with Calix Ltd, an environmental technology company, is progressing with the objective of decarbonising the processing of spodumene. A large South Korean steel company, POSCO, is the downstream project partner that has started the commissioning of a lithium hydroxide plant, producing the finished product used in batteries and EVs.
With such strong fundamentals providing solid downside protection while simultaneously setting a platform for significant upside, the Australian Eagle Asset Management team have gradually built up a position in Pilbara Minerals in the past few months. As the most shorted stock on the ASX, the share price could rise significantly when the spodumene price inevitably recovers, forcing short sellers to close their positions.
While the team cannot claim any expertise in forecasting spodumene prices, we remain confident, given its current strong balance sheet and low cost of production, that Pilbara Minerals will be one of the long-term winners of the future as the world moves away from fossil fuels and accelerates towards renewable energy.
The Montgomery Fund and the Montgomery [Private] Fund owns shares in Pilbara Minerals. This blog was prepared 18 March 2024 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Pilbara Minerals, you should seek financial advice
Daniel Chan joined Australian Eagle Asset Management in 2014 as an Investment Analyst, and beyond the usual realms of financial modelling, Daniel is also responsible for writing research papers for portfolio stocks as well as stocks within the ASX 100. He is also responsible for the implementation of the Australian Eagle investment philosophy across the portfolio and bringing to the team’s attention any company inflection points that may assist with the purchase or sale of these stocks.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
