Pilbara Minerals (ASX: PLS) shares are down some 12% over the past month. Perhaps 17% down for PLS shares - depends whether we believe Google or the Australian Stock Exchange. No matter, the price is down some 80 cents from recent peaks. There have been some shorting the stock and clearly they’re right so far. What we want to know of course is what happens next.
It’s worth repeating ourselves about Pilbara Minerals: “The basic deal at Pilbara is that it's the result of one of the truly great bargains in mining industry history. Back in 2013 or so there was a run up in the lithium price. This meant more exploration, more mines tried to come online. One, within a company called Altura, got financed, went into production and then went bust. It went bust because the finance costs could not be covered by the now low - low because lots of mines got financed - lithium price. Pilbara bought that mine out of the bankruptcy and then, almost exactly then, the lithium price soared again. Pilbara has near 50% net profit margins on $2 billion of sales as a result. The timing was exquisite.” Truly one of the great deals of all times. Catching the turn in the market near perfectly.
However, the next question about Pilbara is where does the market go from here? “Sky-high prices for lithium carbonate, the key element for batteries that last year surged to $80,000 a tonne when fears over a supply crunch peaked, also played a role. Miners and refiners greenlit projects or maxed out capacity to cash in on the boom, pushing production up and prices down. Lithium carbonate last week traded at $21,000, a 75 per cent fall.”
Pilbara Minerals share price from Google Finance
We tend to think that drop in the lithium price is not fully reflected in the Pilbara price. But then this is where things get complicated. For lithium concentrate contracts - Pilbara sells concentrate - tend to come with caps and collars. Some production is sold under such contracts, some at free market prices. So, we don’t know how much of current production Pilbara has *not* been getting free market prices upon. We also don’t know how much of the pain of these falling prices rests upon the concentrate buyer - that collar - just as we’re not sure how much of the soaring price - the cap - went to them, not the miner.
The finances of a producing lithium concentrate mine can be complicated. At some point those falling lithium prices are going to affect Pilbara Minerals. The problem is working out when and how much?
