Company Overview: Pilbara Minerals Limited is a strategic metals producer. The Company is engaged in the exploration, development and mining of mineral resources. It owns the Pilgangoora Lithium-Tantalite Project, which is located in the Pilbara region of Western Australia. The Pilgangoora Lithium-Tantalite Project is located approximately 120 kilometers southeast of Port Hedland in Western Australia. The Pilgangoora Lithium-Tantalite Project is a spodumene (lithium-mineral) deposit. It has a farm-in and joint venture agreement over approximately six tenements comprising its West Pilbara project. The Pilgangoora Lithium-Tantalite Project has an Indicated and Inferred Resource of approximately 213 metric tons grading over 1.32% lithium oxide and 116 parts per million (ppm) Tantalite and 1.08 Iron oxide. Its subsidiaries include Tabba Tabba Tantalum Pty Ltd, Sturt Resources Ltd, Pilbara Lithium Pty Ltd, Pilgangoora Holdings Pty Ltd and Pilgangoora Operations Pty Ltd.


PLS Details

Pilbara Minerals-A Major New Global Lithium Producer: Pilbara Minerals Limited (ASX: PLS) is a mining and exploration company which specialises in exploration and development of the specialty metals lithium and tantalum. As on April 2, 2019, Pilbara Minerals reported to have a market capitalisation amounting to $1.35 billion. The company had reported the results for the half-year ended December 2018 in which the company witnessed progress at its Pilgangoora Project. In the half-year ended December 2018, PLS became a major new global lithium producer as there was an official opening of Pilgangoora Project. During the same period, PLS progressed commissioning and ramp-up of Pilgangoora Project and the first shipment of spodumene concentrate was delivered to the customers in the month of October 2018. In August 2018, there was a completion of the definitive feasibility study (DFS) for Stage 2, 5Mtpa expansion of Pilgangoora Project which was a crucial milestone and it demonstrated competitive forecast cash operating costs, strong operating margins, long life and exceptional economic returns. The company posted consolidated loss after tax of $11,899,000 in the half-year ended December 2018 as compared to a loss after tax of $9,973,000 in the same period of the previous year. The loss for half-year ended December 2018 included exploration expenses amounting to $4,415,000, an unrealised foreign exchange loss amounting to $6,094,000 associated with Pilbara’s US$100 million Nordic bond debt facility and also non-cash share-based payment expenses which were of $1,788,000.

Pilbara Minerals is expected to get support from decent liquidity levels and a sound base of total current assets. Apart from these factors, the company witnessed positive results from Scoping Study considering the Stage 3 expansion at Pilgangoora Lithium-Tantalum Project which might attract the attention of the investors moving forward. 
 

Income Statement for Half-Year Ended December 2018 (Source: Company Reports)

PLS from Liquidity Perspective: Pilbara Minerals is having decent liquidity levels at the end of December 2018 which is evident from its current ratio of 1.99x as it is higher than the industry median of 1.89x reflecting that the company is in a better position to meet its short-term obligations as compared to the broader industry. Debt to Equity ratio stood at 0.43x in 1HFY19 which is marginally down from the prior corresponding period where the same was 0.46x. The decent liquidity footing might also help the company in making deployments towards its business activities which could support its long-term growth prospects. Additionally, the company is possessing decent current assets base as, at the end of December 2018, it was $113 million. We expect that the company’s decent current assets base coupled with its cash position would continue to support its strategic business objectives moving forward.

In the month of August 2018, PLS had executed US$15 million working capital facility and foreign exchange hedging facility with BNP Paribas. The facility was established in order to support risk and capital management initiatives during the growth phase of Pilbara and commissioning of Stage 1 and Stage 2 expansions. The facility was undrawn at December 31, 2018.

Update on Partnering Process: Pilbara Minerals has recently made an announcement that it started a partnering process to interconnect uncommitted Stage 3 Pilgangoora offtake with future JV chemical conversion facilities. Also, PLS has plans to unload a minority interest of between 20% to 49% in the Pilgangoora Lithium-Tantalum Project in Western Australia. The partnering and offtake process come after the positive Stage 3 Scoping Study which reflected robust long-term growth pathway of the project. The company had received interest from the third parties with regards to project ownership and product offtake at Pilgangoora. The outcome from the partnering process is anticipated by mid-2019. 

The compelling Stage 3 Scoping Study on a proposed expansion of Pilgangoora to 7.5Mtpa, along with partnering process, might support a funding package for combined Stage 2 and 3 Pilgangoora expansions. The equity placement of A$50 million to Ganfeng gives immediate funds to help preliminary works for Stage 2 expansion.

Positive Stage 3 Scoping Study Outcomes: Pilbara Minerals had made an announcement that Scoping Study considering Stage 3 expansion at Pilgangoora Project delivered positive results. As a result, the scale and quality of Pilgangoora Project have been re-affirmed. As per the release, the Scoping Study results reflect a long-life, low-cost operation with strong LOM revenue amounting to A$16.60 billion and LOM average annual EBITDA amounting to A$684 million (real) over an estimated 15-year mine life.


Key Outcomes of Stage 3 Scoping Study (Source: Company Reports)

Considering the estimated incremental capital cost amounting to A$225.83 million (+/- 30%), the proposed Stage 3 project is anticipated to witness Pilgangoora Project’s processing capacity expand to 7.5Mtpa.As a result, this would deliver an average of approximately 1.2Mtpa ~6% spodumene concentrate and ~1.1Mlbspa 30% tantalite concentrate over an estimated 15-year LOM, based on existing project reserves. Also, Pilbara Minerals had made an announcement that there was no material impact to the Pilgangoora operations in north Pilbara because of tropical cyclone Veronica.

Declaration of Commercial Production at Pilgangoora: Pilbara Minerals Limited had recently declared commercial production at Pilgangoora Lithium-Tantalum Project effective April 1, 2019, after the sustained delivery of spodumene concentrate at Pilgangoora over quarters ended December and March of FY19. The company stated that spodumene concentrate production was steady and the production is trending towards design capacity and the process plant feed-rates achieved plant design requirements of 270 tonnes per operating hour and there are anticipations that it would continue moving forward. Also, the product quality has been achieved and would achieve customer specification requirements and the average recovery rates achieved are stable.  

Wrapping Up of Equity Placement to Ganfeng Lithium: Pilbara Minerals had made an announcement that it received A$50 million from Jiangxi Ganfeng Lithium Co. Ltd with respect to previously announced subscription agreement. The equity placement amounting to A$50 million happens to be in lieu of debt or pre-payment facility for Ganfeng to secure an additional 75,000tpa of spodumene concentrate with respect to Stage 2 offtake agreement. The equity subscription involves an issue of 77,663,871 ordinary fully paid shares consisting an issue price amounting to $0.6438 per share.

What to Expect from PLS Moving Forward: The strategy of Pilbara Minerals to secure the position as one of the largest, lowest cost lithium-tantalum producers in the world happens to be the focus moving forward. The company stated that Korea is expected to be a significant player in the global battery supply chain. The proposed 30% JV with POSCO for South Korean chemical conversion plant helps Pilbara Minerals in diversifying the customer base. 


Korean Companies’ Battery Plant Expansions (Source: Company Reports)

The company stated that a low cost, long life, and high-quality operation supports Pilgangoora as one of the best lithium raw material projects in the world. With respect to high quality, the company stated that there are leading offtake partners like General Lithium, Ganfeng Lithium, POSCO and Great Wall Motors which might support overall growth of the company moving forward. The opportunity to expand the future production with respect to Pilgangoora Project got reinforced during September 2018 after there was an announcement of 35% increase in the Ore Reserves. As a result, the updated Ore Reserve contains estimated 1.36Mt of contained Li2O and 28.5 million lbs of Ta2O5, extending mine life to approximately 23 years based on proposed Stage 2, 5Mtpa operation.

Stock Recommendation: From the valuation perspective, the stock of Pilbara Minerals has a higher P/B ratio at 4.0x as compared to the industry median of 1.4x. However, Pilbara Minerals is having leading offtake partners which might act as a tailwind for the company moving forward. Also, the Scoping Study considering Stage 3 expansion at Pilgangoora Project delivered positive results which might attract the attention of the market players. Recently, GFL International Co., Limited became a substantial holder of the group since March 26, 2019 with 8.37% of voting power.

However, the company’s stock has delivered the return of -19.13% in the span of previous six months while, in the time frame of previous three months, it posted 2.07% return. By looking at prevailing volatility but decent cash position of PLS along with having clear expansion pathway in order to meet the customer growth requirements, we have a “Speculative Buy” recommendation on the stock at the current market price of A$0.77 per share (up 4.054% on April 02, 2019). 

 
PLS Daily Chart (Source: Thomson Reuters)

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