Lithium batteries are in hot demand. Can miner Pilbara keep on trucking?

Lithium, the soft, silvery-white metal at the heart of the clean energy shift, is in hot demand these days.

As a key ingredient in lithium-ion batteries, securing vastly greater supplies of the commodity is essential for powering a growing global fleet of electric cars and storing renewable energy to feed the grid when the wind isn’t blowing and the sun isn’t shining.

But in the minerals-rich outback of Western Australia, home to more than 20 per cent of the world’s known lithium, the companies developing the next generation of mines to meet expectations of booming demand have endured a tumultuous few years.

Lithium miners have endured a tumultuous few years.

“It’s been a rollercoaster,” says Dale Henderson, the chief executive of ASX-listed Pilbara Minerals – “a rollercoaster that Pilbara has enjoyed with white knuckles, holding on for dear life”.

There is little doubt that the world will need much more lithium than it has right now. Electric car sales are rising rapidly. Carmakers are expanding their electric vehicle lines. All around the world, governments are signing up to increasingly ambitious emissions-reduction targets, and some are setting deadlines to phase out combustion-engine cars altogether.

All told, global lithium supplies may need to lift as much as six-fold between now and 2030, some analysts say.

‘It’s been a rollercoaster – a rollercoaster that Pilbara has enjoyed with white knuckles, holding on for dear life.’

Pilbara Minerals CEO Dale Henderson

The last time things looked this bright for lithium, when prices tripled from 2015 as the electric vehicle revolution began to dawn, the small and highly speculative market went from boom to bust. A rush of new mines came on too soon, tipping the sector into oversupply. Cuts to Chinese electric car subsidy programs stalled demand.

By 2019-2020, many lithium mines had been slowed or mothballed, there were large-scale lay-offs, and some companies went into administration.

Pilbara Minerals, one of the ASX’s top producers of lithium found in hard rocks, calls this period the “lithium winter”.

“It was cold, bitter and just kept going,” Henderson told the Melbourne Mining Club last month. Production had to be temporarily suspended at the company’s flagship Pilgangoora mine, south of Port Hedland. Demand was so thin that management installed a bell at the office to ring when they landed a sale, and alert the site team to turn the plant back on.

But three years is a long time in the resources sector – long enough for fortunes to dramatically change. Pilbara Minerals’ bell began ringing much more frequently as dwindling global supplies collided with much-stronger-than-expected increases in demand for electric cars, not only in China, but in the US and Europe, too. The company’s stock price has soared 1500 per cent, from 30¢ in 2020 to as high as $5 earlier this year.

With a market value of $15 billion, Pilbara Minerals in December joined the ranks of the nation’s 50 biggest listed companies, the S&P/ASX50. Last month, it posted a stunning half-year profit rise of 989 per cent to $1.2 billion, and it declared its first-ever dividend.

Henderson and others now insist that lithium demand is structurally different from what it was in 2019 – less reliant just on China, more diversified and much less volatile.

“For the investors out there who worry, ‘Gee, will 2019-20 happen again?’ I can’t say ‘no’ and I can’t say ‘never’, but what I point out is the structural demand,” he says.

Some analysts believe lithium prices will continue receiving “strong support” in 2023 and beyond amid expectations of an ongoing supply crunch. Others, however, are cautioning that 2023 could see lithium pricing reach an “inflection” point as higher prices spark new supplies but slower demand.

Already, the price of lithium in China has come off significantly since the start of the year, causing considerable investor unease. Pilbara Minerals’ share price has dropped 15 per cent since its peak in November.

So, what now lies ahead for Pilbara Minerals? Have lithium prices hit their ceiling, or could the wonder metal’s meteoric rise continue? And what might it all mean for the company’s ability to keep generating strong profits and returns?

Industry: Mining.

Main products: Lithium spodumene, tantalite concentrate.

Key figures: Chief executive Dale Henderson, chairman Anthony Kiernan.

How it started: Founded by a group of geologists including Neil Biddle and John Young, who had all been at university together at the Western Australian Institute of Technology in the 1980s, Pilbara Minerals acquired the Pilgangoora project in 2014.

At first, the company was developing what it thought would be a mine focused on tantalum, a corrosion-resistant metal valuable for its use in electronics. However, by 2015, it was apparent that the site’s deposits of lithium would be most sought-after amid the rise of lithium-ion batteries and intensifying concerns of a looming severe global undersupply. From 2015 to 2018, lithium prices almost tripled.

How it’s going: Pilgangoora began its first lithium production in 2018, just in time for the “lithium winter”. From there, Pilbara Minerals CEO Henderson recalls, it was a fight for survival, with a focus on defending the company’s balance sheet and preserving it to emerge on the other side.

There were redundancy rounds and its mining contractors were temporarily stood down. Ultimately, though, it weathered the storm, unlike some, including Pilgangoora’s neighbouring lithium miner, Altura Resources, which went into receivership in 2020.

Towards the end of that year, Pilbara Minerals struck a $US175 million deal to buy Altura’s assets, giving it ownership of the largest independent hard-rock lithium complex in the world. From 2021 onwards, the market truly began to turn, and Pilbara Minerals has been in “ramp-up” mode ever since, investing in projects to boost Pilgangoora’s production capacity towards its aim of reaching 1 million tonnes a year.

In the December half, production hit 309,225 dry metric tonnes of spodumene (hard-rock lithium) concentrate, an increase of 83 per cent from the same time a year earlier. Its average sales price was $US4993 per dry metric tonne, up 305 per cent.

The bull case: The speed of electric vehicle uptake since 2021 has beaten most analysts’ forecasts. Despite a weakening in global economic conditions, sales and production of electric vehicles continued their rapid growth trend, according to the federal government’s latest trade report.

Pilbara Minerals CEO Dale Henderson.Credit: Aresna Villanueva

“Global sales of all types of EVs increased 40 per cent in the nine months to September 2022 compared with the same period in 2022, with Chinese sales up 110 per cent, European sales up 6 per cent and North American sales up 27 per cent,” the report said.

A supply gap is forecast to persist in coming years, it added, with global lithium supplies from both hard-rock and brine operations remaining insufficient to meet demand.

Even if lithium prices come under pressure in the near term because of oversupply concerns, the outlook may still remain robust. For the world to meet countries’ existing decarbonisation pledges, the International Energy Agency has calculated that demand for lithium will increase six-fold by 2030, requiring the equivalent of 50 new average-sized mines.

As well, Pilbara Minerals is accelerating plans to seize a greater share of the electric battery raw material value chain, moving beyond simply producing lithium concentrate and into potentially more lucrative areas. Under a partnership with sustainable technology company Calix, it aims to upgrade the spodumene from its Pilgangoora mine through a refining process at the site. It has also reached a deal with South Korea’s POSCO to develop a 43,000-tonne facility in Gwangyang to produce battery-ready lithium hydroxide.

Barrenjoey analyst Glyn Lawcock described Pilbara Minerals’ latest financial results as a “clean set of numbers”, noting that it appeared on its way to becoming a more reliable and mature performer.

The bear case: Lithium prices have already retreated 30 per cent since the start of the year, owing to uncertainty in Chinese demand for electric vehicles and discounts being offered by China’s largest battery manufacturer, CATL, to some Chinese automakers, which could put added pressure on the lithium price. Citi Research analysts believe prices will trade “higher for longer” relative to historical levels, but last week downgraded their 12-month outlook as downside risks appear to be increasing.

“Investors remain concerned about the prospects for electric vehicle demand in China, especially after the country ended subsidies for electric vehicle purchases at the beginning of the year,” Citi said. Weaker electric vehicle sales for January 2023 had exacerbated the situation, they added, driving destocking by battery and cathode producers of inventory accumulated over the last two years. “We believe the bear run in lithium prices is likely to continue for a few more weeks before stabilising.”

A longer-term risk for lithium prices and producers is the possible rise of sodium-ion battery technology, which uses cheaper raw materials and could be an alternative to lithium-ion batteries. Sodium-ion batteries have lower energy density than lithium-ion batteries, but are faster to charge and perform better in cold temperatures. In February, Hina Battery and Sehol — a joint venture brand between JAC and Volkswagen Anhui — unveiled a test vehicle powered by sodium-ion batteries, while other major battery players have announced plans to produce sodium-ion batteries from this year.

“This announcement raises the possibility of an accelerated adoption of the battery technology in passenger vehicles,” Citi said. “We believe there is scope for sodium-ion batteries to start garnering a small share of China battery demand from 2025 onwards.”

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.