This is an extremely well thought through primer and I thank you as it was what I was looking for.
I'm coming at this from the perspective of considering an investment in Pilbara Minerals or PLS (I'm an Australian). But I'm still trying to wrap my head around the whole geography and this is just a way for me to clarify my own thoughts based on your primer! Feel free to correct anything that's not correct!
Lithium is not especially rare and current proven reserves are likely to be more than enough to meet anticipated demand for a long time to come.
You are saying Lithium carbonate and hydroxide are not interchangeable without some cost and have different applications with hydroxide being the more premium material. There is the possibility the two markets could dislocate as currently the economics of carbonate to hydroxide do not make sense.
The overall backdrop to the current lithium market/price is that recent high prices and higher real and anticipated demand has led to overcapacity in production and a bear market. Additionally there is a view that China is flooding the market with cheap lithium that's partially state subsidized in order to maintain its dominant position.
With regards to the last point I'm unsure what role this will continue to play? Since China is the main producer of lithium batteries I am also unsure to what extent they can satisfy their own demand from domestic reserves now or in the future?
The pricing is a little complicated as much of production is sold on contract rather than on public markets and varies by region and presumably transport costs to its final destination?
There also the issue of competing battery chemistry with iron ore devotees like Robert Friedland who are not believers in lithium - but since it is one of the lightest minerals on the periodic table this seems overstated.
What this means for PLS:
Specifically ,PLS has no debt so it meets your very sensible criteria of being unlevered which due to the cyclical nature of commodities and lithium is a big thumbs up.
Greenbushes which is the best hydroxide mine in the world has costs of about $600 per tonne of concentrate (or $7.5k per ton of hydroxide). In comparison PLS which has the second best hydroxide mine in the world has costs of about $680 per tonne.
PLS says they need $1400 a tonne to make money, current level is $700 a tonne so they are barely cash flow neutral and not certainly not capital profitable. But they have no debt so if there is not any further decrease in the price they can survive the squeeze? You think the price will settle out between $1000-$1500 a tonne.
PLS does not produce any lithium hydroxide in Australia, they have recently entered a JV in Korea to send their concentrate to. Due to the nature of the market hydroxide processors will always be the first to get squeezed as carbonate is cheaper you are saying. It's a fairly small 18% per cent investment - probably not material.
PLS has made a relatively small investment in hard rock miner in Brazil which seems a little bonkers since you've got all this cheap carbonate coming out of South America but its been done at probably a good price. Not that material anyway if it goes tits up as we like to say here in Australia.
I dunno man - Buffet stays away from these types of businesses is my first thought!! Too many unknowns, I don't think there will be a problem on the demand side in the long term but who knows what China will do, who knows about battery chemistry, who knows about processing technology re carbonates which have a cost advantage and if the upside is $1500 a tonne it's not really enough?
Thank you!! I'm very grateful for your primer, it may have helped me avoid a costly mistake and will look to become a subscriber!
Hi Leslie, thanks for the comment and the subscription. Indeed Pilbara seems like an interesting play in (almost) pure play Australian spodumene. That said, spodumene-hydroxide will probably remain the marginal resource, so I would try to answer two questions to study Pilbara:
1- How long can they survive at low ($700/800) prices? That seems mostly solved by their FOB costs, which are pretty low, as you say. Being unleveraged is a big plus here as well.
2- What is the EV or market cap yield on a cycle-average scenario, say at $1000/$1,500 per tonne of spod concentrate? That yield has to be very very good for the risk to make sense. For example, if Pilbara could generate $500M in net income or CFO - Maintenance Capex with a $1,200/tonne of spod-conc level, then the fair price of the stock might be $1.5 billion tops. I haven't run the numbers for Pilbara so the above are all just made up, but you get the idea.
Thanks Leslie. I find the carbonate cost curve very interesting, specifically three points:
a) the figures are more or less in line with what I expected for 2028
b) expansion in the curve between 2024-2025 seems to be a result of investment decisions in 2022/23, the question is whether the curve will continue to widen into 2027/28 and later
c) If the cost curve is correct, by 2025 all of current global lithium consumption can be serviced by carbonate alone, leaving little space for hydroxide. this will continue to exert pressure on hydroxide to cut capacity.
I do get the idea, I suspect the demand for Lithium will be go more crazy than people realise at some point. The battery technology is evolving in leaps and bounds.
But you've given me a deeper insight into the risks involved and I think I might stay out of it, although my intuition tells me on the balance of probabilities there is some money to be made. PLS is still 11 per cent short sold.
This is an extremely well thought through primer and I thank you as it was what I was looking for.
I'm coming at this from the perspective of considering an investment in Pilbara Minerals or PLS (I'm an Australian). But I'm still trying to wrap my head around the whole geography and this is just a way for me to clarify my own thoughts based on your primer! Feel free to correct anything that's not correct!
Lithium is not especially rare and current proven reserves are likely to be more than enough to meet anticipated demand for a long time to come.
You are saying Lithium carbonate and hydroxide are not interchangeable without some cost and have different applications with hydroxide being the more premium material. There is the possibility the two markets could dislocate as currently the economics of carbonate to hydroxide do not make sense.
The overall backdrop to the current lithium market/price is that recent high prices and higher real and anticipated demand has led to overcapacity in production and a bear market. Additionally there is a view that China is flooding the market with cheap lithium that's partially state subsidized in order to maintain its dominant position.
With regards to the last point I'm unsure what role this will continue to play? Since China is the main producer of lithium batteries I am also unsure to what extent they can satisfy their own demand from domestic reserves now or in the future?
The pricing is a little complicated as much of production is sold on contract rather than on public markets and varies by region and presumably transport costs to its final destination?
There also the issue of competing battery chemistry with iron ore devotees like Robert Friedland who are not believers in lithium - but since it is one of the lightest minerals on the periodic table this seems overstated.
What this means for PLS:
Specifically ,PLS has no debt so it meets your very sensible criteria of being unlevered which due to the cyclical nature of commodities and lithium is a big thumbs up.
Greenbushes which is the best hydroxide mine in the world has costs of about $600 per tonne of concentrate (or $7.5k per ton of hydroxide). In comparison PLS which has the second best hydroxide mine in the world has costs of about $680 per tonne.
PLS says they need $1400 a tonne to make money, current level is $700 a tonne so they are barely cash flow neutral and not certainly not capital profitable. But they have no debt so if there is not any further decrease in the price they can survive the squeeze? You think the price will settle out between $1000-$1500 a tonne.
PLS does not produce any lithium hydroxide in Australia, they have recently entered a JV in Korea to send their concentrate to. Due to the nature of the market hydroxide processors will always be the first to get squeezed as carbonate is cheaper you are saying. It's a fairly small 18% per cent investment - probably not material.
PLS has made a relatively small investment in hard rock miner in Brazil which seems a little bonkers since you've got all this cheap carbonate coming out of South America but its been done at probably a good price. Not that material anyway if it goes tits up as we like to say here in Australia.
I dunno man - Buffet stays away from these types of businesses is my first thought!! Too many unknowns, I don't think there will be a problem on the demand side in the long term but who knows what China will do, who knows about battery chemistry, who knows about processing technology re carbonates which have a cost advantage and if the upside is $1500 a tonne it's not really enough?
Thank you!! I'm very grateful for your primer, it may have helped me avoid a costly mistake and will look to become a subscriber!
Hi Leslie, thanks for the comment and the subscription. Indeed Pilbara seems like an interesting play in (almost) pure play Australian spodumene. That said, spodumene-hydroxide will probably remain the marginal resource, so I would try to answer two questions to study Pilbara:
1- How long can they survive at low ($700/800) prices? That seems mostly solved by their FOB costs, which are pretty low, as you say. Being unleveraged is a big plus here as well.
2- What is the EV or market cap yield on a cycle-average scenario, say at $1000/$1,500 per tonne of spod concentrate? That yield has to be very very good for the risk to make sense. For example, if Pilbara could generate $500M in net income or CFO - Maintenance Capex with a $1,200/tonne of spod-conc level, then the fair price of the stock might be $1.5 billion tops. I haven't run the numbers for Pilbara so the above are all just made up, but you get the idea.
you may find this interesting
https://www.marketindex.com.au/news/pls-min-igo-and-ltr-face-more-challenging-lithium-environment-says-morgan
Thanks Leslie. I find the carbonate cost curve very interesting, specifically three points:
a) the figures are more or less in line with what I expected for 2028
b) expansion in the curve between 2024-2025 seems to be a result of investment decisions in 2022/23, the question is whether the curve will continue to widen into 2027/28 and later
c) If the cost curve is correct, by 2025 all of current global lithium consumption can be serviced by carbonate alone, leaving little space for hydroxide. this will continue to exert pressure on hydroxide to cut capacity.
I do get the idea, I suspect the demand for Lithium will be go more crazy than people realise at some point. The battery technology is evolving in leaps and bounds.
But you've given me a deeper insight into the risks involved and I think I might stay out of it, although my intuition tells me on the balance of probabilities there is some money to be made. PLS is still 11 per cent short sold.