The lithium boom just went to another level

It’s the shot being heard around the mining world (reports Chanticleer in The Australian Financial Review).
16th September 2021

Just after 7pm on Tuesday evening, Perth-based lithium producer Pilbara Minerals announced it had conducted just its second-ever auction on the Battery Material Exchange, a platform it launched in March to sell unallocated tonnes of spodumene concentrate from its Pilgangoora complex, 120 kilometres from Port Hedland in Western Australia’s resource-rich Pilbara region.

Pilbara’s first auction via the BMX platform yielded impressive results, fetching the equivalent of $US1420 a tonne at the industry benchmark for spodumene.

Given spodumene prices languished at $US400 a tonne in September 2020, when the future of the lithium sector looked a lot less bright, it was a terrific result for Pilbara Minerals and yet more evidence of lithium’s resurgence.

But Tuesday night’s auction was something else entirely.

Pilbara revealed in its short ASX announcement that it has sold 8000 tonnes of lithium for a staggering $US2240 a tonne. Convert that to benchmark price and the auction yielded the equivalent of $US2500 a tonne.

Before the ASX opened on Wednesday morning, Pilbara Minerals was already one of the market’s shooting stars, with its shares surging more than seven-fold in 12 months, from 32¢ to $2.26.

When the bourse opened, after the world had spent 15 hours dissecting the incredible auction result, Pilbara Minerals shares shot up again, leaping 9.7 per cent to an all-time high of $2.48. The stock’s 12-month gain now stands at 675 per cent.

Pilbara Minerals is part of a new mining boom that is ironically being driven by climate change, or, more specifically, the need to electrify large parts of the economy to reduce emissions.

Producers of lithium and other minerals needed in this electrification, such as IGO (whose stock is up 111 per cent in a year), Orocobre (up 268 per cent) and Mineral Resources (up 88 per cent) have been transformed from minnows to emerging giants in 12 months as commodity prices soared.

The technology these minerals are powering might be new and shiny, but at its heart, this boom is decidedly old-fashioned – a simple issue of supply and demand.

On the one hand, surging sales of electric vehicles have created a surge in demand for lithium. Total electric vehicle sales so far this year were 3.1 million vehicles, almost the same as sales in the whole of 2020.

Macquarie Research’s commodity strategy team recently lifted its sales forecast for the calendar year to 5.83 million vehicles, which would represent growth of 83 per cent year-on-year.

But supply can’t grow quickly enough to meet rising demand. Low lithium prices in 2019 and much of 2020 meant there was little incentive to develop new mines and so the market is likely to be tight until 2025.

And with the EV market only going to expand further – perhaps to as many as 15.7 million vehicles by 2025 – Macquarie suggests that even if every probable lithium mine on the books could be ramped up, supply shortages could develop by 2025.

Now, Pilbara’s bonanza on Tuesday night needs to be put into some context. While the CEO Ken Brinsden is keen to ramp up the use of the BMX platform, Macquarie said on Wednesday the 10 million tonnes auctioned so far account for less than 5 per cent of Pilbara’s forecast production in the 2022 financial year.

The spodumene spot price is running at $US990 a tonne, although where it trades after Pilbara’s big result remains to be seen.

Regardless, the market estimates of earnings for the likes of Pilbara are well behind both spot prices and the $US2500 a tonne achieved by Pilbara on Tuesday night.

Macquarie forecasts earnings before interest, tax, depreciation and amortisation for Pilbara Minerals in the 2022 financial year at $428 million, based on the current spot price of $US990 a tonne. But at $US2500 a tonne, EBITDA would be more like $1.2 billion.

Clearly, the market is moving very quickly and volatility should make investors cautious.

But it’s hard not to see a certain level of desperation for tonnes in Tuesday’s auction result, pointing to surging demand.

 

 

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