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Pilbara Minerals flags Stage 3 Pilgangoora expansion, secures Stage 2 funding

Pilbara Minerals Ltd.'s shares rose by 16.0% on Jan. 3 after locking in funding for its A$231 million Pilgangoora Stage 2 expansion in Western Australia, flagging a Stage 3 expansion and making moves with POSCO to develop a larger joint venture chemical conversion facility in South Korea.

On Jan. 3, Pilbara Minerals announced a multipronged funding package to provide the balance of the funding required to support the development of the Stage 2 expansion of its Pilgangoora lithium-tantalum project to 5 million tonnes per annum.

The package comprises a US$25 million off take prepayment facility by Great Wall Motor Co. Ltd. and a A$50 million equity placement to Jiangxi Ganfeng Lithium Co. Ltd, satisfying both their Stage 2 funding commitments, plus a proposed new US$50 million Nordic bond to be issued in accordance with Pilbara Minerals' existing Nordic Bond.

The balance of the A$231 million will come from existing cash mostly related to the previous equity placement to POSCO, and future cash-flow generated from Stage 1 operations.

Stage 3 upside

Pilbara Minerals also announced on Jan. 3 that it had signed a non-binding memorandum of understanding with POSCO to consider a larger jointly-owned chemical conversion facility in South Korea of up to 40,000 tonnes per annum of lithium carbonate equivalent, over the existing 30,000 tonnes per annum. It will be based on the patented PosLX purification process to produce high-grade hydroxide and carbonate products.

The MoU will boost POSCO's existing spodumene concentrate offtake agreement from Pilgangoora from 240,000 tpa to 315,000 tpa to support the larger chemical facility, of which Pilbara Minerals will become a 30% JV partner if it exercises its right to do so by Feb. 28. Final documentation and board approvals are due in May.

Thus Pilbara Minerals has started evaluating expansion opportunities for a potential "Stage 3" project to be commissioned no sooner than early 2021 which would boost processing capacity to up to 7.5 Mtpa.

It will initially have the ability to configure an interim step to process 6.2 Mtpa, delivering up to 1 Mtpa of spodumene concentrate, or over 130,000 tpa of lithium carbonate equivalent. Stage 3 will be underpinned solely by Pilgangoora's existing ore reserve.

The aforementioned subscription agreement with Ganfeng will see Pilbara Minerals provide a further 50,000 tpa of spodumene concentrate to the Chinese player from any Stage 3 expansion, in exchange for a product prepayment facility of at least US$20 million.

Defying market expectations

Pilbara Minerals said in one of its two Jan. 3 ASX releases that Stage 3 also gives the company the potential to grow supply for new or existing offtakers, which Pilbara Minerals CEO Ken Brinsden said was a "very deliberate statement" and defies the current state of equity markets in lithium.

Both Brinsden and other analysts see a continuing "disconnect" between the still-very active lithium-ion supply chain activity and the relatively poor performance of stocks. Pilbara Minerals' stock has shrunk from A$1.10 per share on July 13, 2018, to 58 Australian cents on Dec. 21, 2018.

"With companies becoming more integrated, the scale of investment in facilities be it battery making or chemical processes, and relationships with car manufacturers … the industry is moving so quickly and yet it's not being reflected in equity valuations," Brinsden told S&P Global Market Intelligence.

Pilbara Minerals is looking at a range of ancillary infrastructure optimization initiatives to aid the Stage 3 expansion including gas and hybrid solar power supply, road development, additional water supplies and communications infrastructure to further cut operating costs.

Brinsden said his company's positive stock response was also recognition that the ramp-up of the Stage 1 processing plant is head of expectations. December production was about 23,500 dry metric tonnes of spodumene concentrate. This is equal to an annualized rate of about 280,000 tpa of spodumene concentrate, or over 85% of Stage 1 design capacity.

"People worry about the ramp-up of lithium plants because the industry doesn't have a great track record, but we're demonstrating that we're doing it well and we feel we did enough test work and made investments in the right places to give ourselves the best chance of success," he said.

Pilbara Minerals said Jan. 3 that given Stage 1's outstanding performance and "softer conditions" in the Chinese domestic market, it has re-assessed the benefits of continuing the direct shipping ore operation instigated during the early stages of Stage 1 construction to provide early cash flow.

The company said that given the relative benefits of maintaining a separate DSO operation are "no longer as material as they once were," it has started talks with customer Atlas Iron Ltd. and end customer Sinosteel Australia Pty. Ltd. to determine whether or not to continue the the DSO operation, which is suspended until the talks come to fruition.