Pilbara Minerals wants to produce more lithium – But will this support the share price?

Pilbara Minerals (ASX: PLS) recently unveiled plans to potentially triple production at its Pilgangoora mining hub in Western Australia. But is this a good idea given current lithium prices?

The P2000 Pre-Feasibility Study indicates that Pilgangoora could produce over 2 million tonnes of lithium spodumene annually at a cost-effective rate, even at prevailing prices. While Pilbara hasn't made a final investment decision, this move signals that major players are committed to volume growth – even as lithium prices tumble towards levels reminiscent of the previous bear market.

Currently, Pilbara is on track to meet its FY24 production guidance of 660,000 to 690,000 tonnes of spodumene and the ongoing P1000 expansion project aims to boost production to 1 million tonnes within two years.

Analysts weigh in

To recap, some of the key highlights from the P2000 PFS include:

• 2 million tonnes per annum potential production capacity

• $2.6 billion net present value

• $1.2 billion estimated capex for a new ore flotation plant (-20% to 30% accuracy)

• Feasibility study results expected in Q4 2024

• Final investment contingent on study outcomes, approvals and market outlook

The proposed 80% increase in production could flatten the cost curve and discourage higher-cost greenfield projects, according to analysts. The expansion provides the optionality for higher production should market conditions improve as.

The project's capital intensity raised concerns, with some analysts modeling for higher capex to account for potential cost overruns. Consensus suggests the project would only proceed under improved pricing conditions, reflecting caution towards large capital commitments in a volatile market.

Market impact is another consideration, as an expansion of this scale could push out the lithium supply surplus through to the end of the decade and suppress prices for longer. The prospect of additional supply has kept analysts cautious due to oversupply concerns.

The average target price among 20 sell-side brokers was cut 3.7% to $3.62 as of Monday, 24 June.

Leveraged to higher prices

Pilbara Minerals stands out among lithium companies by pursuing expansion studies despite challenging market conditions. This resilience demonstrates that world-class producers like Pilbara can maintain solid margins even as prices moderate from their 2022-23 peaks.

For context, Pilbara Minerals reported average realized selling prices of US$1,645 per tonne in the first half of FY24, yielding EBITDA margins of 55%. This contrasts with the prior corresponding period, where the company saw average realized prices of US$4,993 and EBITDA margins of 83%.

The P2000 PFS Presentation slide deck illustrates the leverage built into the expansion project. However, it's important to note that current spodumene prices hover around US$1,089 per tonne, down around 1.5% since June to a near three-month low.

Source: Pilbara Minerals P2000 PFS Outcomes Presentation

The study projects an NPV of $2.6 billion, assuming long-term spodumene forecasts of US$1,500 per tonne — approximately 50% above current spot prices.

The bottom line – The PFS study highlights Pilbara Minerals' potential to capitalise on higher lithium prices and boost production if market conditions improve. However, current spot prices, industry headwinds and capex risks might see P2000 plans sit on the sidelines ... for a while.