Pilbara Minerals Limited

Company Overview: Pilbara Minerals Limited (ASX: PLS) is an Australian lithium-tantalum producer, mainly involved in the development of its 100%-owned Pilgangoora Lithium-Tantalum Project, which is located in Western Australia’s Pilbara region, approximately 120 km from Port Hedland.  The Pilgangoora project is known for its outstanding scale and low-cost operations. The company follows a growth and diversification strategy to become a sustainable, low-cost lithium producer and fully integrated lithium raw materials and chemicals supplier.

PLS Details

Outlook Supported by Low-Cost Operations and Near-term Expansion Capacity: Pilbara Minerals Limited (ASX: PLS) is an Australian lithium-tantalum producer that owns 100% of the world-class Pilgangoora Lithium-Tantalum Project (Pilgangoora Project) in Western Australia’s resource rich Pilbara region. As on 10 March 2021, the company’s market capitalisation stood at ~$2.75 billion. The Pilgangoora Project’s high-grade resource, valuable tantalum bi-product and low-cost operation is a major competitive advantage for PLS over its peers. The company’s strategy is focused on unlocking the full value of the Pilgangoora Project’s deposit and positions itself as a fully integrated participant in the lithium raw materials and chemicals value chain. From 2018 to 2020, the company’s revenue has grown at a CAGR of ~187.4%.

Past 3-year Financial Performance for Year Ending 30 June, Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Looking ahead, the company is focused on diversifying its business into lithium chemical conversion, which will allow it to further interconnect product produced at the Pilgangoora Project within this supply chain and will also allow it to pursue value-add opportunities. As a result of the recent acquisition of Altura Lithium Project, PLS expects to realise tangible synergies, including economies of scale, operational flexibility, removal of duplicated services and the unlocking of sterilised Ore Reserves. With low-cost operations and near-term expansion capacity, the company seems well placed to cater for the growing lithium raw material demand in the future.

Improved Bottom-line in H1FY21: During the half-year ended 31 December 2020 (H1FY21), the company witnessed improved spodumene concentrate demand conditions, resulting in higher production and increased spodumene concentrate sales. Over the period, around 114,239 dmt of spodumene concentrate was shipped. Due to better market demand conditions, improved plant performance and utilisation rates, and lower unit cash operating cost, the company achieved a positive cash gross margin of $8.1 million for H1FY21, compared to cash gross margin loss of $1.8 million in the previous corresponding period (pcp). For H1FY1, the company posted a positive consolidated EBITDA of $1.7 million, compared to an EBITDA loss of $24.1 million in pcp. Statutory net loss after tax stood at $21.2 million in H1FY20, compared to a statutory loss of $63.4 million in pcp, representing an improvement of 66.7%. During the period, the company strengthened its balance sheet by successfully refinancing US$100 million Nordic Bond (Nordic Bond) with a low-cost US$110M senior secured, syndicated Finance Facility (Finance Facility) from BNP Paribas and the Clean Energy Finance Corporation. As at 31 December 2020, the company had cash of $248.0 million.

H1FY21 Results (Source: Company Reports)

FY20 Result Highlights: During the year ended 30 June 2020 (FY20), the company produced 90,768 dmt of spodumene concentrate. Further, it shipped 116,256 dmt of spodumene concentrate, realising sales of $84.15 million. During the year, PLS also shipped 143,336 lbs of 5% and 30% tantalite concentrate to Global Advanced Metals Greenbushes Pty Ltd. Net loss for FY20 stood at $99.26 million. In October 2019, the company completed an equity raising of $111.5 million, providing PLS with the comfort and headroom to deal with softness in the global lithium market and tackle the challenges associated with the COVID-19 pandemic. Over the year, PLS secured refinancing of the original US$100 million project development debt facility with a new US$110 million debt facility from BNP Paribas and the Clean Energy Finance Corporation (CEFC).

Key Financial Outcome (Source: Company Reports)

Key Metrics: For FY20, the company’s gross and EBITDA margin stood at -33.2% and -40.3%, respectively. Current ratio and Debt to Equity ratio for FY20 stood at 1.51x and 0.46x, respectively. Cash cycle for FY20 stood at 87.4 days, lower than 220.2 days in FY19.

Past 3-year Financial Performance for Year Ending 30 June, Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form around 38.28% of the total shareholding, while the top four constitutes the maximum holding. AustralianSuper and Contemporary Amperex Technology Co., Ltd. are holding a maximum stake in the company at 8.30% and 6.72%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Acquisition of Altura Project: In January 2021, the company completed the acquisition of Altura Project by acquiring all the shares in Altura Lithium Operations Pty Ltd (ALO), the entity which owns the Altura Lithium Project (Altura Project). The acquisition will help the company to facilitate the strategic consolidation of the adjoining lithium mining and processing operations. The consolidation of the Altura Project with Pilbara Minerals’ existing operation will help in delivering tangible synergies, including economies of scale, operational flexibility, removal of duplicated services and the unlocking of sterilised Ore Reserves. In order to fund the acquisition, the company conducted an equity raising of ~$240.2 million, with $179.6 million of these funds received by 31 December 2020.

Change of Directors’ Interest: The company recently announced that one of its Directors, Sally-Anne Layman, who hold an indirect interest in the company, has acquired 17,849 ordinary shares by disposing of 17,849 share rights. Sally-Anne Layman now holds 100,257 ordinary shares of the company.

Key Risks: The company is exposed to the risk and uncertainties caused by the COVID-19 pandemic. Further, it is exposed to the risks associated with the fluctuations in the demand and price of lithium products.

Outlook: As a result of the acquisition of Altura Project, PLS now has two processing plants, providing it with the flexibility to blend products to suit customer and market requirements, as well as dial production up or down to meet customer needs and market conditions. Looking ahead, the company is focused on completing a comprehensive evaluation of the Altura Project to inform both its integration strategy and future operating strategy. The company plans to optimise the integration of the adjoining lithium mining and processing operations while increasing production and maintaining a healthy balance sheet. Currently, the demand and price of lithium raw material are moving in an upward trend, resulting in improved spodumene pricing. With low-cost operations and near-term expansion capacity, PLS seems well placed on to capitalise on this part of the cycle.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last three months, the stock of PLS has provided a return of 19.19%. The stock has a 52-week low and high price of $0.125 and $1.467, respectively. On the technical analysis front, the stock has a support level of ~$0.739 and a resistance level of ~$1.23. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We believe that the company can trade at some premium to its peer average EV/Sales (NTM trading multiple), considering the improved demand and price of lithium raw material, better market demand conditions, as well as improved plant performance in H1FY21. We have taken peers like Galaxy Resources Ltd (ASX: GXY), Orocobre Ltd (ASX: ORE), and Mineral Resources Ltd (ASX: MIN). Considering the company’s decent performance in H1FY21, healthy balance sheet, expected benefits from the recently acquired Altura Project, growing demand for lithium raw materials and valuation, we give a “Buy” recommendation on the stock at the current market price of $0.955, up by 0.526% as on 10 March 2021.

PLS Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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