14-April-2024: I received a link to the following article today in an email from Roger Montgomery's investment management company:
https://rogermontgomery.com/pilbara-minerals-the-asxs-most-shorted-stock-yet-poised-for-long-term-success/ [19-March-2024]
[Not behind a paywall]
PILBARA MINERALS: THE ASX’S MOST SHORTED STOCK, YET POISED FOR LONG-TERM SUCCESS?
As a low-cost and long-life spodumene producer (spodumene is a raw material used to produce lithium for batteries in your phone, e-bike and electric vehicles (EVs)), Pilbara Minerals (ASX:PLS) is one of the highest quality single commodity miners on the ASX. The share price has been punished recently, with the spodumene price falling from over U.S.$8,000 per tonne to below U.S.$1,000 per tonne in just over 12 months.
This was driven by slowing demand as governments around the world wound back their subsidies for EVs, and the higher cost of living began to take a toll on consumers. A large oversupply had emerged as commodity producers ramped up supply, a logical response to high spodumene prices that were far above production costs for even the newest and most inefficient operators.
Given the tough operating environment, Pilbara Minerals management behaviour has showcased a measured and conservative approach to surviving the price cycle. The company has a strong net cash position of over $1.5 billion, built up from high prices in previous years and prudent deployment of capital. With cash costs of production of AU$691 per tonne, the company has been able to maintain profitable operations throughout this difficult period as higher-cost rivals suspend or close operations to reduce cash burn.
The company’s production expansion projects, P680 and P1000, are well progressed and have a two-fold effect. Increased production volume will go some way in offsetting falls in realised price, while increasing economies of scale decrease the unit cost of production per tonne. Current annual production is 620kt and will increase 60 per cent to 1 million tonnes beyond FY25.
The company has also partnered up for mid-stream and downstream projects, which have the potential to increase future returns to shareholders. A mid-stream joint venture operation with Calix Ltd, an environmental technology company, is progressing with the objective of decarbonising the processing of spodumene. A large South Korean steel company, POSCO, is the downstream project partner that has started the commissioning of a lithium hydroxide plant, producing the finished product used in batteries and EVs.
With such strong fundamentals providing solid downside protection while simultaneously setting a platform for significant upside, the Australian Eagle Asset Management team have gradually built up a position in Pilbara Minerals in the past few months. As the most shorted stock on the ASX, the share price could rise significantly when the spodumene price inevitably recovers, forcing short sellers to close their positions.
While the team cannot claim any expertise in forecasting spodumene prices, we remain confident, given its current strong balance sheet and low cost of production, that Pilbara Minerals will be one of the long-term winners of the future as the world moves away from fossil fuels and accelerates towards renewable energy.
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The Montgomery Fund and the Montgomery [Private] Fund owns shares in Pilbara Minerals. This blog was prepared 18 March 2024 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Pilbara Minerals, you should seek financial advice.
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By Daniel Chan 
Daniel Chan joined Australian Eagle Asset Management in 2014 as an Investment Analyst, and beyond the usual realms of financial modelling, Daniel is also responsible for writing research papers for portfolio stocks as well as stocks within the ASX 100. He is also responsible for the implementation of the Australian Eagle investment philosophy across the portfolio and bringing to the team’s attention any company inflection points that may assist with the purchase or sale of these stocks.
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I always read these sort of bullish reports from the POV that the writers either holds shares themselves or the company they work for does, or else it's a paid report on behalf of the company being reported on. That said, you can often still find useful pieces of information in these reports that do help to form an independent view - it's just always best to use multiple sources of info rather than just one, especially when that one is expected to paint the company in the best possible light.
That said, I can't argue that Pilbara Minerals (PLS), as Australia's most shorted company, with more than 20% of their SOI being shorted - see here: ShortMan - Short position graph for PLS ...is primed for a northbound SP spike IF the shorters are wrong and there is a short squeeze.
The argument behind shorting PLS appears to be more around shorting lithium, and PLS being the largest and easiest ASX-listed pure-lithium play to short.
My own thoughts on that are that PLS is the strongest pure lithium player in Australia (possible the World) and they're in a very strong (net cash) position with a huge pile of cash to tide them over even if prices stay below their cost of production for a decent chunk of time, and if I was going to short a lithium company, PLS would not be my first choice. [I never short any companies by the way, that was just a hypothetical]
Another analyst, Gaurav Sodhi from Intelligent Investor has also been bullish on PLS, although he has recently (in early March) changed his "Buy" call on PLS to a "Hold".
The Intelligent Investor Australian Equity Income Fund (Managed Fund) (ASX:INIF), the Intelligent Investor Ethical Share Fund (Managed Fund) (ASX:INES), and the Intelligent Investor Australian Equity Growth Fund (Managed Fund) (ASX:IIGF) all own shares in Pilbara Minerals Limited (PLS).
Here's a link to Gaurav's latest thoughts on PLS - may be behind a paywall:
Pilbara Minerals: Interim result 2024 - Intelligent Investor [01-Mar-2024]
I don't hold PLS - as I'm not ready to have direct exposure to a pure lithium play. I don't understand the supply/demand dynamics and environment in lithium enough to be comfortable with that exposure, however I do hold MinRes (MIN) shares in multiple portfolios (including here) and they do have some lithium assets - but it's not all they do - they are also diversified across iron ore, mining services, and investing.
But back to PLS. The company's management have done well. They've acquired good assets at cheap prices and then worked them hard and built up a very healthy warchest of cash while investing billions back into their own business to lower their own costs and set themselves up very nicely for the future. They also developed a sort of lithium auction system that should allow them to rapidly benefit from higher lithium prices when they come, rather than having locked in all of their future production at set prices for years as many other lithium miners have done. Excellent foresight and planning, superb execution from a quality management team; there's a lot to like about Pilbara Minerals.
If and when I want pure lithium exposure, this is the company I would be looking to get it through.
Here's just the start of Gaurav's March article on PLS:
Pilbara Minerals: Interim result 2024
Amid lower prices, this result was a flex.
We all knew this was coming. Amid tumbling lithium prices, Pilbara Minerals’ margins, profits and cash flow all crashed.
Net profits for the period fell from $1.2bn to $220m; operating margins crumbled from 83% to 55%. This was because received lithium prices went from almost US$5,000 a tonne to US$1,645.
Despite those dramatic falls, this result was a demonstration of how good Pilbara’s wholly-owned asset is.
The fact that the miner still made operating margins of over 50% and operating cash flows of over $500m for the half year neatly illustrates why we upgraded Pilbara amid grim pessimism (see Pilbara Minerals: luck and lithium).
Of course, lithium prices are lower now, so those margins will be crunched again, but no one else in the industry is making much cash. Here we have proof, if we needed any more, that Pilbara is the best hard rock lithium asset in the world.
Pilbara is doing what low-cost mines ought to do: maximising output.
For more, see here: https://www.intelligentinvestor.com.au/recommendations/pilbara-minerals-interim-result-2024/153340
How Will Pilbara Minerals Spend Their $3.3B? With CEO Dale Henderson | Daily Mining Show - YouTube
Aug 4, 2023: "Money of Mine has delivered another great interview for the Money Miners today with none other than Pilbara Minerals CEO Dale Henderson."
"We visited the Pilgangoora operations and got the chance to sit down with the boss and grill him on how they’ll spending their big pile of cash, building an enduring business and his take on how hard it will be for competitors to bring lithium production online."
"We also ran through Trav’s Top Tweets, with as always, some hilarious content."
"Next week we’ll be at Diggers and Dealers in Kalgoorlie, so if you’re around town, come to De Bernales where we’ll be set up and tell us what you’re hearing on the decline!"
All Money of Mine episodes are for informational purposes only and may contain forward-looking statements that may not eventuate. The co-hosts are not financial advisers and any views expressed are their opinion only. Please do your own research before making any investment decision or alternatively seek advice from a registered financial professional.
CHAPTERS
0:00 Preview
0:24 Intro
3:11 Our Thoughts on Pilbara Minerals site Pilgangoora
8:43 Interview with Pilbara Minerals CEO Dale Henderson
21:20 Trav’s Top Tweets
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Disclosure: I found this interview really interesting - however I do not own any PLS shares at this point in time. They are certainly on my watchlist.
By the way, for those interested in lithium and how long it takes between declaring a Maiden Resource Estimate and actual production, which is quite a few years, and is longer for mines outside of Australia it seems, and the money value of time - or the "time value of money" as Trav put it - over these "time to production" periods - especially when production takes years longer to achieve than expected, the MoM podcast boys had an excellent discussion on this in their July 31st podcast (just over a week ago) which started off about the Maiden Resource estimate that had just been declared by Patriot Battery Metals (PMT.asx) but covered a number of other names as well - you could start here for just that discussion, or at the beginning if you want to listen to the whole podcast.
[I don't hold PMT either, but I do hold MIN whose founder and boss Chris Ellison was quoted by the boys in that podcast]