Pilbara Minerals flags a 47% drop in lithium prices

Short interest in Pilbara Minerals (ASX: PLS) has almost tripled since the beginning of the year to an all-time high of 15.5% and for good reason. The company’s September quarter report further validates the bearish view towards lithium, with average realised spodumene prices down 47% year-on-year and 31% quarter-on-quarter to US$2,240 a tonne.

The last time spodumene prices were this low was around October 2021 when the company’s Battery Material Exchange sold a 10,000 tonne cargo of spodumene for US$2,350 a tonne.

September quarter at a glance

The result was a broad miss against consensus expectations. 

From a quarter-on-quarter perspective, production and shipments were down 17% and 11% respectively while unit operating costs rose 19% (FOB Port Hedland ex-royalties). 

Pilbara Minerals attributed the increase to “operational readiness costs in support of the P680 expansion project and lower production volume relative to Q4 FY23.” These costs are expected to decline over FY24 as production volumes increase from P680.

Revenue fell 47% to $493 million reflecting the sharp decline in lithium prices.

Looking ahead

Pilbara Minerals says demand for lithium raw materials for the December quarter is expected to remain consistent amid a “typically stronger period for EV sales.”

“Market pricing for spodumene concentrate and lithium chemicals is however likely to continue to remain volatile in the near-term given uncertain macroeconomic conditions and closely managed inventories in the supply chain,” the company said in a statement.

Making up for lost time

Pilbara Minerals has a lot of work cut out for it if it wants to meet its FY24 guidance of 660-690,000 tonnes of spodumene at a unit operating cost between $600-670 a tonne.

Even bullish brokers are starting to sour on the once-favoured lithium producer. Jarden recently downgraded the company's FY24 earnings forecast by 30% to $1.39 billion, citing a combination of lower lithium prices and marginally reduced volumes.Given the sharp drop in earnings, the analysts do not expect the company to pay a dividend in FY24. 

“We now forecast negative free cash flow of $620 million in FY24 (from -$200 million), which we again note is largely a result of the ~$773 million tax true-up related to FY23 earnings and the FY24 capex guidance of A$875-975 million,” they said.

Back in August, Macquarie was Outperform rated with a $7.30 target price. However, the analysts assumed an average spodumene price of US$5,000 a tonne for FY24. Either spodumene prices double from here or maybe it's more responsible to halve their price target?

Pilbara Minerals 12-month price chart (Source: Market Index)