Lithium Price Plunge, Dividend Suspension, Yet Stocks Still Rise?

Introduction:

Low mining costs are key

PLS cash flow and balance sheet management

Can the stock price still rise without an interim dividend?

What is the outlook for lithium mines?

After lithium prices entered a downcycle, lithium mine producer Pilbara Minerals Limited (ASX: PLS) has repeatedly warned investors not to expect an interim dividend, as the company is striving to cope with the significant impact of the sharp decline in lithium industry prices.

As one of the few lithium mining companies in Australia that have entered the mining and processing stage, PLS has maintained close contact with Chinese market partners and has signed lithium spodumene concentrate supply agreements with companies such as Tianqi Lithium, which is partially owned by CATL, and Ganfeng Lithium Industry.

In fact, the price of lithium spodumene concentrate sold by most Australian lithium miners has dropped by nearly 90% in the past year, and the price of lithium mines seems to have not yet hit the bottom, making investors and financial institutions cautious.

In mid-to-late January, research and consulting firm Wood Mackenzie published a report that bluntly predicted that lithium prices will remain low for the next five years, leading to the rejection of a A$760 million loan for Australian lithium giant Liontown by a consortium of four major banks.

Under the impact of funding, Liontown was forced to announce a slowdown in the expansion of its lithium project in the Katherine Valley, Western Australia. This means that within three months since the withdrawal of a A$6.6 billion acquisition offer by American giant Albemarle, the company's stock value has evaporated by nearly A$4 billion.It is worth noting that today, the Australian stock market's ASX200 index hit a three-year high during intraday trading, reporting at 7,629.8 points, indicating a market recovery. Consequently, compared to the crises faced by its peers, Pilbara Minerals Limited (PLS) saw its stock price rise by 5.8% on the day of its financial report release, even though the data was not ideal. What sets PLS apart and earns such market recognition?

Low mining costs are the key factor. Greenbushes is currently the world's largest and highest-quality spodumene mine in terms of reserves and quality. At present, only Greenbushes and PLS can control their ore production costs below $400 per ton, while several other mines, due to various reasons, have development costs that are almost double or even triple that amount per ton.

The current selling price of spodumene is approximately $850 per ton (AUD 1,293), which means that miners with development costs exceeding AUD 1,200 per ton have already entered a stage of selling at a loss.

If we also consider the costs after processing into lithium carbonate, the costs for lithium carbonate per ton for Greenbushes and PLS are approximately CNY 54,000 and CNY 67,000, respectively. Even with the selling price of lithium carbonate at over CNY 90,000 per ton, miners are still profitable.

In contrast, the Australian mining company Core Lithium (ASX: CXO) has an ore mining cost of $756 per ton, and the cost of lithium carbonate is CNY 86,700 per ton. Amidst a continuing downward trend in lithium carbonate prices, Core Lithium was forced to halt mining operations and warned of a significant impairment of its inventory value.

Core Lithium owns an open-pit spodumene mine, the Finniss mine, which is the only fully permitted lithium project outside of Western Australia, with minor shareholders including Ganfeng Lithium and Yahua Group.

Therefore, the logic of low mining costs being key for miners is based on the premise that in the event of a decline in lithium ore prices, high-cost lithium mines in Australia are squeezed and forced to cease production. Low-cost lithium mines, however, can still capture the market and deliver better balance sheet performance.

PLS also stated that its lower production costs place it in a favorable position to "weather and capitalize on a period of lower prices." If competitors encounter difficulties, PLS would be in an even more advantageous position and might consider acquiring them.PLS's Excellent Cash Flow and Balance Sheet Management

In addition to the advantage of having lower mining costs, PLS also performs well in terms of cash flow and other financial aspects.

As shown in the figure below, although PLS's cash decreased by nearly 900 million Australian dollars compared to the previous quarter, this was mainly due to the payment of taxes. Currently, there are still 2.1 billion Australian dollars in cash on the balance sheet, and the production and operating activities have brought in a positive cash flow of 176 million Australian dollars, indicating a good overall asset condition.

At the same time, the foundation of PLS's positive cash flow is also based on the growth of production activities. In 2023Q4, PLS's production increased by 22%, sales volume grew by 9%, and the cost per unit of ex-works price decreased by 14%.

Moreover, there is still a lot of room for growth in its production. At present, PLS's expansion activities are still progressing in an orderly manner, with its P680 project and P1000 project both under construction smoothly, and it is expected to officially start production in the third quarter of FY25. PLS's goal is to increase the annual production to 1 million tons through the expansion of the Pilgangoora mine, further consolidating the status of Pilgangoora as a world-class mine.

On the demand side, PLS has signed a new lithium ore purchase contract with Ganfeng Lithium, and from 2024 onwards, PLS will supply an additional 160,000 tons of spodumene concentrate to Ganfeng Lithium at market prices over the next three years. By 2027, Ganfeng Lithium will be able to purchase up to 310,000 tons of spodumene concentrate at market prices each year, which is equivalent to double the previous supply.

This not only provides a guarantee for PLS's future positive cash flow but also allows PLS to continue with more confidence in the mine expansion project.

In terms of the industry chain, PLS is actively developing the midstream and downstream industry chain, establishing a joint venture with South Korea's POSCO to produce products such as lithium hydroxide, in order to capture the maximum profit.

In summary, although PLS's profit margins have been squeezed due to the sharp decline in lithium prices, its future performance will be very "stable". Compared with other miners facing many uncertainties, this may be the reason why PLS is favored.

Will the stock price still rise after suspending the interim dividend payment?In August last year, following an incredible financial performance in the fiscal year of 2022-23, Pilbara Lithium (PLS) proposed plans to pay a special dividend and repurchase shares. It announced an interim dividend of 11 Australian cents per share for the first time in the previous fiscal year.

However, in the current fiscal year, PLS warned that it is unlikely to pay an interim dividend in the first half of the year under the current market conditions. Based on free cash flow, the total dividend payment is estimated to be between 70 million and 110 million Australian dollars, calculated at a dividend payout ratio of 20% to 30%.

Although PLS still has over 2.1 billion Australian dollars in cash, it continues to adopt a cautious cash flow management policy. This is mainly due to the ongoing development of its mining projects, future capital expenditures, and the current market environment where PLS may be waiting for competitors to falter in order to initiate acquisitions.

What is the outlook for lithium mining?

Benchmark预计 that global electric vehicle sales will quadruple over the decade leading up to 2033, increasing from 13.8 million units in 2023 to 59.1 million units, with lithium demand growing fivefold during the same period to over 5 million tons of lithium carbonate equivalent.

The rapid compound annual growth rate delights investors in more commodities. However, the issue facing the lithium industry is that lithium miners and battery manufacturers have significantly expanded production capacity using the cheap capital available at the time, in hopes of gaining more market share, leading to somewhat excessive inventory levels among battery manufacturers.

Citing estimates from the China Automotive Battery Innovation Alliance, Wood Mackenzie reported that the total production of power batteries in China in 2023 was 747 gigawatt-hours, but only 387 gigawatt-hours were installed in products. This means that a considerable portion of batteries have not yet been installed in vehicles.

With electric vehicle manufacturers not yet motivated to restock, battery manufacturers will also reduce their purchases of lithium mines, which could mean that demand for lithium mines remains weak, and prices still have room to decline.

The plummeting lithium prices are good for consumers and the transition to clean energy. However, for miners like PLS, the days of unlimited prosperity are gone, and more small and medium-sized lithium exploration companies or mines that have not yet started production may fail.

But for investors, the market's overreaction to lithium prices presents potential investment opportunities. It is important to maintain patience and confidence before the bottom signals become clear.When engaging in any investment, please consider the applicability of the information contained in this article based on your personal investment objectives, financial situation, or individual needs, make decisions cautiously, and bear the risks yourself.