Is Pilbara Minerals a bargain at $1?
Who could have guessed Pilbara Minerals would spiral ~80% from all-time highs to a mere $1.00?
Source: Shutterstock
Mentioned
KEY POINTS
- Pilbara Minerals is fast approaching the key $1.00 level, an 80% decline from its 2023 peak, driven by a downward spiral in lithium prices
- UBS downgraded Pilbara to Sell, cutting its target price 15% to $1.10, citing oversupply and a trimmed long-term spodumene price forecast of US$1,200 per tonne
- Spodumene prices are at a four-year low of US$625 per tonne, with Pilbara’s operating costs at US$499 per tonne, threatening profitability
- Pilbara’s cash balance fell 40% year-on-year to $1.1 billion, with $109 million in quarterly outflows due to ongoing expansion projects
- Weak EV demand, highlighted by BYD’s 20% price cuts and high Chinese auto inventories, signals further pressure on the lithium sector
Few could have foreseen Pilbara Minerals (ASX: PLS), a low-cost, operationally strong, and cash-rich lithium producer, plummeting to around $1.00 – a level last seen in May 2021 and a staggering 80% decline from its 2023 peak.
So, is this lithium bellwether a bargain at this price? The answer hinges on lithium prices, which are currently testing even the world’s most efficient producers.
Lithium Prices Under Pressure
Lithium prices are hovering dangerously close to production costs, rendering many operations unprofitable. While low prices may force some supply off the market, the near-term outlook remains subdued, with the path of least resistance pointing to flat or lower prices.
Despite the long-term bullish demand for lithium driven by electric vehicles (EVs), the market is grappling with oversupply. Below, we examine the latest catalysts and data shaping the lithium and EV sector.
UBS Downgrades Lithium Miners Amid Oversupply
UBS said the lithium market remains oversupplied despite current prices moving into the cost curve. The analysts expect further supply cuts, but believe the market is still overestimating the level of short-term cost support and long-term price assumptions.
"Having cut our 2030 EV demand forecasts 16% and updated our long-term incentive price analysis (~1.75mt of new lithium supply required by 2032), we trim our long-term spodumene price 8% to US$1,200 a tonne, " the analysts said in a note last Friday.
"As we work through only the second lithium cycle since EVs, we have a larger and more diverse supply side than last cycle. Cost curves have been flattening and price support falling (US$700-800/t)."
As a result, UBS downgraded several key lithium miners:
Mineral Resources downgraded to Neutral from Buy; target price cut by 2% from $26.10 to $25.70
Pilbara Minerals downgraded to Sell from Neutral; target cut by 15% from $1.30 to $1.10
IGO downgraded to Sell from Neutral; target cut by 16% from $4.30 to $3.60
Liontown Resources downgraded to Sell from Neutral; target cut by 23% from 65 cents to 50 cents
Patriot Battery Metals retained Buy; target cut by 18% from 40 cents to 33 cents
Patriot Battery Metals has likely retained a Buy rating due to the sheer size of its lithium deposit.
Where are spot prices?
The latest Shanghai Metals Market pricing for spodumene sits at US$625 a tonne (CIF), as of 30 May. It's a nerve racking price level for most producers.
Pilbara’s March quarter report revealed:
Revenue down 30% quarter-on-quarter and 39% year-on-year.
Unit operating cost (CIF) of A$796 a tonne (or US$499 a tonne).
Cash balance down 9% quarter-on-quarter and 40% year-on-year to $1.1bn.
Cash outflows of $109 million for the quarter, largely reflecting capital expenditure for its P1000 project, and broader mine development, infrastructure and sustaining capex.
Macquarie forecasts Pilbara’s all-in sustaining cost at US$544 per tonne in FY25, easing to US$502 in FY26, but rising to the mid-US$600s by FY30. While Pilbara’s strong cash position provides some buffer, ongoing investments to expand production are chipping away at its cash reserves.
Challenges in the EV Market
The lithium sector faces headwinds from a softening EV market. The most recent example of this was from BYD, China’s top-selling EV brand, which slashed prices on 22 electric and plug-in hybrid models to stimulate demand.
Bloomberg reported that BYD cut the price of its Seagull hatchback to 55,800 yuan ($7,780), a 20% reduction for its already affordable model. Despite these discounts, China’s auto dealerships held 3.5 million cars in inventory last month — equivalent to 57 days, the highest since December 2023, according to the China Passenger Car Association.
Morgan Stanley analysts noted, “The official announcement of these discounts signals how tough the end market is.”
High inventory and aggressive price cuts suggest weakening demand, which could further pressure lithium prices. If the EV market remains oversupplied, lithium producers face an uphill battle.
Where to from here?
The lithium market is at a crossroads. Investors may be anchored to the euphoric days of 2022–23, when spodumene prices soared above US$8,000 a tonne.
However, as Goldman Sachs noted in 2022, heavy investment in supply has driven prices down, behaving like a “forward-looking equity.” UBS echoed this, pointing to a larger, more diverse supply side in this second lithium cycle.
If prices stabilise or rise, idled projects like Core Lithium could restart, and Pilbara might advance its P2000 project, which aims to more than double production to 2Mtpa. Yet, while China’s EV sales grew 22% year-on-year to nearly 1 million in April, this growth isn’t enough to absorb the current oversupply.
The Bottom Line
Despite its operational strength, Pilbara Minerals is navigating a precarious lithium market. While its low-cost profile and $1.1 billion cash balance offer a buffer, the ~$1.00 price tag reflects the broader sector’s challenges.
Investors hoping for a bargain on Pilbara Minerals must weigh the potential for a lithium price recovery against the risk of prolonged oversupply and weak EV demand. For now, caution prevails as the lithium market searches for a floor.
