Sunday, October 27, 2024

Pilbara Minerals shares drop on major P2000 lithium expansion news

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Pilbara Minerals Ltd (ASX: PLS) shares are falling on Friday morning.

At the time of writing, the lithium miner’s shares are down 2% to $3.13.

Why are Pilbara Minerals shares falling?

Investors have been selling the lithium giant’s shares following the release of the pre-feasibility study (PFS) for the expansion of production at the Pilgangoora Operation.

According to the release, the PFS determined that production capacity at Pilgangoora Operation could be expanded to more than 2 million tonnes per annum (Mtpa).

As a comparison, for the first three quarters of FY 2024, Pilbara Minerals has delivered production of 499.2 kt.

Management notes that the expansion, which will be named the P2000 Project, is expected to result in the first ten years of annual production averaging ~1.9Mtpa. After which, production of more than 2Mtpa is expected over the first six years after the ramp up.

It believes that P2000 would further extend Pilbara Minerals’ position as the largest pure-play lithium producer globally.

However, the timing of the P2000 Project will depend on the successful outcome of the next level of feasibility study, project approvals, and the market outlook at the time of the financial investment decision (FID).

What are the costs?

The company notes that P2000 would require construction of a new whole of ore flotation plant at Pilgangoora. This would come with an estimated capital expenditure of $1.2 billion (-20/+30% accuracy).

The new plant would complement existing processing flowsheets in use at the Pilgangoora Operation.

Management believes it would be well worth the cost. It estimates that the expansion will create significant shareholder value with a P2000 incremental net present value (NPV) of $2.6 billion and incremental internal rate of return (IRR) of 55%.

This is based on the assumption of a long term spodumene 6% price of US$1,500 per tonne.

Though, it is worth noting that Goldman Sachs estimates that the long term spodumene 6% price will be just US$1,150. At that level, based on its sensitivity chart, the NPV drops closer to $1 billion.

So, investors may need to decide whether the assumptions used for this expansion are too ambitious or not.

Pilbara Minerals has now commenced a feasibility study in relation to P2000. Outcomes are expected in the December quarter of calendar year 2025. A potential FID will follow this.

‘A strong value accretive project’

Pilbara Minerals managing director and CEO, Dale Henderson, was pleased with the PFS. He said:

The PFS demonstrates a strong value accretive project with an incremental NPV of $2.6B through this potential future expansion to the operation at Pilgangoora. This study follows the 35% reserve upgrade to 214Mt announced in August last year.

The growth of the reserve, and the optionality to incrementally expand production, further reinforces Pilgangoora’s position as a Tier 1 asset of global significance.

This expansion is expected to provide an average 1.9Mtpa production for the first 10 years and more than 2Mtpa over the first six years after ramp up. The scale benefits of this expansion will further build on Pilbara Minerals’ position as one of the major leading lithium suppliers globally.

Pilbara Minerals shares are down 37% over the last 12 months.

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