The world needs more lithium, and Pilbara can help

Lithium rocks at the Pilbara Minerals (Photo: Bloomberg)
Lithium rocks at the Pilbara Minerals (Photo: Bloomberg)

Summary

The tight supply chain for electric vehicles should benefit Sydney-listed lithium miner Pilbara Minerals

It might pay to invest at ground level in the growth of electric vehicles.

Car makers are hitting a bottleneck as they race to manufacture more EVs and the lithium-ion batteries that power them: lithium production. The earth’s crust has plentiful supplies of the metal, but little of it is accessible at a cost low enough to make competitively priced cars. Most lithium comes from brines high up in the Andes, or else an ore called spodumene often mined in Australia.

Investment was thin in the years before the pandemic, when China was cutting EV subsidies and support elsewhere was piecemeal. As ever more auto makers, governments and consumers have backed the technology with hard cash, though, demand for lithium has outpaced supply, leading to a massive run-up in prices.

Sydney-listed Pilbara Minerals is a big beneficiary. Its lithium operation got going just in time for prices to turn down in 2018, but the curse turned into a blessing when it acquired a neighboring mine out of bankruptcy. It now controls one of the largest spodumene deposits in the world, located conveniently close to port infrastructure in northwestern Australia.

This time, its output is ramping up at the right time. It sold its spodumene at auction for $6,350 a dry metric ton this month, excluding freight costs, compared with $1,250 in its inaugural auction last summer. Pilbara started holding open sales in an effort to improve the transparency of lithium pricing, which doesn’t trade in any volume on an exchange.

Pilbara mined about 127,000 dry metric tons of lithium ore in the three months through June, which was 56% more than in the previous quarter. Some of its output is tied up in deals agreed when prices were lower, but it also has a big chunk of unallocated production to play with over the coming year or so. Assuming prices hold, the returns should be very strong: Pilbara’s cash balances swelled by the equivalent of roughly $410 million last quarter alone—equivalent to more than 6% of its market value.

Of course, Pilbara also is vulnerable to any potential bust. This risk has haunted the stock this year, particularly since Goldman Sachs in May warned of new supply from China. But lithium extraction is a hugely complex business that typically runs behind schedule, and demand from the auto industry is growing exponentially. Fears of oversupply seem premature. They do offer investors an opportunity to invest at a reasonable price, though.

August’s passage of the Inflation Reduction Act should give demand another boost. The package includes subsidies for EV purchases that are dependent on a proportion of both batteries and the underlying metals being produced and processed in the U.S. or allied territories—conditions designed to create a non-Chinese supply chain.

While much of Pilbara’s current output passes through China, the global hub for lithium processing, this will likely change. The company already has a joint venture to produce battery materials in South Korea with steel company POSCO that should start delivering in late 2023 or early 2024. More initiatives could follow.

Resource stocks aren’t for the fainthearted, particularly in a weakening economy. But lithium’s importance to low-carbon technologies should insulate its demand curve from wider pressures, and the supply response will take years. This is the metal’s moment, and Pilbara has the asset and the expertise to seize it.

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