Brokers cut PLS Group’s price targets on lithium mine expansion. Are they right?

PLS Group (ASX: PLS) finally pulled the trigger on its major West Australian lithium mine expansion, P2000, last week. Within days, a string of major brokers had cut their price targets.

JP Morgan, Goldman Sachs, Barrenjoey, Bell Potter, Macquarie and Morgans were among those to revise their targets. Most left their ratings unchanged (Bloomberg screenshot below).

The cost of getting bigger

P2000 – so named because it allows PLS to hit 2,000kt of production – is designed to double PLS’s output capacity by the end of the decade. The expansion itself was not a surprise.

The surprise was the cost of the additional infrastructure required, including roads, accommodation and mine facilities. Once the numbers were known, price targets were crimped.

Lithium mine expansions are working to broaden and flatten the cost curve. But the open question now is whether analysts are right that this type of expansion deserves price target cuts. And whether the miners are right to proceed in expanding production into a falling market.

Lithium prices continue moving on rumours and sentiment

The first thing on everyone’s mind is the ongoing collapse of lithium prices. 

Macquarie’s update last week captures the feeling.

Chinese lithium futures fell around 12% in a single day last week, following unverified reports that battery giant CATL had cut its October production plan by about 10%. Similar cuts were reportedly spreading through the battery supply chain.

The concern is about 2027 – not 2026. Inventories are still being drawn down (chart above from Macquarie), leaving the near-term market reasonably tight. But markets are forward-looking, and traders fear further production cuts towards year-end, ahead of the planned expiry of a Chinese VAT rebate on energy storage battery exports. Macquarie says fears about 2027 demand are outweighing the tightness in today’s market.

The iron ore playbook

Another item on some people’s minds is that these expansions look like what happened in iron ore some years ago.

Around a decade ago, iron ore prices were sliding. Yet BHP, Rio Tinto and Fortescue expanded production anyway.

The logic was simple. Low-cost producers could withstand lower prices better than their competitors. By adding supply, they put further pressure on higher-cost operations.

Some investors believe lithium producers could be playing a similar game: deliberately suffering short term pain in order to protect market share longer term.

PLS has several advantages for this strategy: a large cash pile, a mine expected to operate for at least 20 years, and roughly half of its expanded output still uncontracted.

But lithium is not iron ore

The comparison is admittedly limited. Lithium is much more fragmented and modular than iron ore.

But where that makes things trickier for analysts is that the price floor then becomes harder to predict. And a deteriorating price environment with an unpredictable price floor makes things uncomfortable.

Macquarie’s estimates (graph above) illustrate the problem. Futures are already approaching the top of the lithium industry’s cost curve. But the next meaningful line of support sits considerably lower, at around 80,000 yuan a tonne of lithium carbonate. Even at that level, only about 10% of global supply would face serious pressure.

Much of the industry’s cost curve is relatively flat. Rather than hitting a clear threshold where large amounts of supply disappear, lithium prices could instead remain depressed for an extended period.

The positives for PLS

PLS Group remains the premier ASX lithium producer. It enjoys a valuation premium because it enjoys deeper index inclusions and absorbs a lot of tactical liquidity from traders looking to express a view on lithium prices.

P2000 costs exceeding estimates is only part of its story. Brokers have trimmed their PLS Group targets, yes. But most have maintained their ratings. Almost every price target sits above the current share price as of Monday’s close ($2.90).

The bigger question is whether being a large, low-cost producer is enough in a lithium market without a clear price floor.

If it is not, PLS shareholders could be in for more pain. But if it is, the rewards could be substantial when the cycle turns.

Lithium miners ETF

For those wanting a more diversified approach to lithium investing, the ETFS Global Lithium Miners ETF (ASX: VOLT) may provide one solution. VOLT invests in global lithium companies that produce lithium as their main business.