Company Overview: Pilbara Minerals Limited (ASX: PLS) is engaged in the mining and extraction of lithium with the Pilgangoora lithium-tantalite project operations in the Pilbara region of Western Australia. PLS produces spodumene (Li₂O) and tantalite (Ta₂O₅) concentrate from the Pilgan plant operations. The company is progressing on a proposed downstream JV to construct ~43,000 tonnes per year LCE (lithium carbonate equivalent) lithium chemical conversion facility in South Korea.

PLS Details

Latest Corporate Presentation Highlights:

The following table summarises incremental production capacity plans that PLS aims to undertake at the Pilgangoora project. 

Growth Plans, Source: Analysis by Kalkine Group

Operational Highlights of Q3FY22 (ended 31 March 2022):

• Monetise Mid-Stream Opportunities: PLS has completed a scoping study for the Mid-Stream JV project underway with Calix (ASX: CXL) to aid the construction of a demonstration plant chemicals plant at the Pilgangoora project. PLS aims to produce value-added green lithium phosphate salts (Li₃PO₄) through a new refining process.
• Decarbonising Operations: PLS finalised a life cycle assessment to identify opportunities for decarbonisation at the Pilgangoora project and within its supply chain downstream.

Quarterly Trend of Operational Results, Source: Analysis by Kalkine Group

Downstream JV Opportunity with POSCO:

• PLS (~18% interest) has met the conditions precedent to the finalisation and formation of the downstream JV with POSCO (~82%). On 13 April 2022, PLS drew down ~$79.60 million as per the Convertible Bond Agreement to fund the equity portion of the JV with POSCO. It plans to issue ~79.60 million convertible bonds in favour of POS-LT Pty Ltd., a 100% subsidiary of POSCO.

The company is witnessing a rise in the spodumene concentrate price on the BMX with ~US$5,650/dmt, realised in an auction carried out on 27 April 2022. PLS reported a surge in lithium raw material and concentrate prices in Q3FY22, driven by robust demand from the automotive EV market.

Metrics Growth, Highlights; (Analysis by Kalkine Group)

Growth and Profitability Metrics; (Analysis by Kalkine Group)

Key Metrics: PLS witnesses consistently improving gross margins from 1HFY20. For 1HFY22, PLS posted its first positive NPAT and record revenue growth in 1HFY22 over the prior year.

Top 10 Shareholders:

The top 10 shareholders together form ~31.19% of the total shareholding. Contemporary Amperex Technology Co., Ltd. and AustralianSuper hold a maximum stake in the company at ~6.97% and ~6.20%, respectively.

Key Risks:

• Lithium Price Changes: PLS faces the risk of changes in the lithium prices influenced by demand, production, and supply conditions.
• COVID-19 Led Disruptions: The company faces labour supply shortages, wage cost inflation risk, and logistics related issues due to the persistence of COVID-19.

Plans & Roadmap:  

• CXL and PLS aim to liaise with the Australian government to execute the grant funding as per MMI and finalise a formal JV contract (on the mid-stream project) by early Q3FY22 to undertake an FID in late 2022.
• Production guidance for FY22 is confirmed between ~340 - ~380,000 dmt and it is expected to be towards the lower end of the guidance spectrum if COVID-19 impacts continue

Outlook and Growth Plans; (Analysis by Kalkine Group)

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

Source: 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: The stock of PLS gave a negative return of ~5.40% in the past month and a positive return of ~16.66% in the past six months. The stock has a 52-weeks high level of $3.890 and low level of $1.055. The stock has been valued using the EV/Sales-multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount than its peers’ mean EV/Sales multiple, considering the COVID-19 disruptions, volatility in lithium prices, and high debt-to-equity ratio. For this purpose of valuation, a few peers like IGO Ltd (ASX: IGO), Western Areas Ltd (ASX: WSA), Mineral Resources Ltd (ASX: MIN), and others have been considered. Considering the robust demand and pricing outlook for lithium, capacity expansion undertaken at the Pilgan plant, further plans to boost production, a turnaround in NPAT in 1HFY22, an indicative upside in valuation, associated key business risks, we give a ‘Buy’ rating on the stock at the closing market price of $2.800, as of 18 May 2022, up ~2.56%.

PLS Daily Technical Chart, Data Source: REFINITIV  

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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