Pilbara Minerals Limited

PLS Details

Latest Update on MOU to Refine Lithium Chemicals: Pilbara Minerals Limited (ASX: PLS) is engaged in the exploration, development, and mining of mineral resources. Recently, the company has announced about executing Memorandum of Understanding (MOU) with Calix Limited (Calix) for the development of lithium chemicals refinery. Under the MOU, both the parties will study on the scope of lithium salt production at Pilbara Minerals by utilising Calix’s core technology. If Successful in scoping study, both the parties are likely to form a joint venture to develop a demonstration plant at Pilgangoora and commercialise the developed technology.

1HFY21 Financial Highlights: The company has registered an increase in its revenue from contracts with customers to $59.09mn in 1HFY21 against $37.76mn in 1HFY20, on the back of increased demand for dry metric tonnes (dmt) of spodumene concentrate. Due to weaker prices for lithium chemical and higher cost of sales, the company has registered a loss of $21.15mn in 1HFY21. PLS has seen an improvement in its cash situation to $247.98mn as on 31 December 2020 against $86.25mn as on 30 June 2020.

Key Financials (Source: Company Reports)

Key Risks: The company operates in multiple countries. Any severe movement in foreign exchange prices may lead to financial losses for the company. Moreover, the company holds interest-bearing loans, any increase in interest rates may lead the company to bear higher interest expenses.

Outlook: PLS expects the scoping study for lithium chemicals under MOU with Calix is likely to continue till late 2021. On successful findings, both the parties are likely to form a joint venture to commercialise the lithium refining activities. PLS may commence a plant improvement project in 2HFY21 that may aid the company to produce an additional 10%-15% (~30-50ktpa) of the total production capacity.  

Valuation Methodology: EV/Sales based Relative Valuation Method (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: The stock of PLS gave a return of ~9.05% in the last one month and a return of ~25.87% in the last three months. The current market capitalisation of PLS stands at ~$3.78bn as of 11 May 2021. The stock is currently trading above the average 52-weeks’ price level range of ~$0.195-~$1.467. On the technical analysis front, the stock has a support level of ~$1.147 and a resistance of ~$1.467. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of high single-digit upside (in % terms). We believe that the company can trade at a slight premium as compared to its peer average, considering an increase in revenue in 1HFY21 and an increase in cash and cash equivalents as on 31 December 2020. For this purpose, we have taken peers Orocobre Ltd (ASX: ORE), Galaxy Resources Ltd (ASX: GXY), Mineral Resources Ltd (ASX: MIN). Considering the company has executed an MOU with Calix for the development of lithium chemical refinery, strong balance sheet with higher cash, higher demand for spodumene concentrate, current trading levels, and valuation, we recommend a “Hold” rating on the stock at the current market price of $1.265, down by ~3.066% as on 11 May 2021.

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

Alumina Limited

AWC Details

An Update on Q1FY21 Performance: Alumina Limited (ASX: AWC) is present in the global bauxite, alumina, and aluminum industry, which it conducts principally through bauxite mining and alumina refining. The company conducts these business activities through its joint venture, Alcoa World Alumina & Chemicals (AWAC). The company has updated on its business performance in Q1FY21 on 16 April 2021. As per the management, the price of alumina has increased to $301/t in Q1FY21 against prices in Q4FY20 on the back of higher average realised price to $298/t (Increased by $26/t). The company has reported a higher cost of production, mainly on the back of stronger Australian dollar and seasonal maintenance. AWC’s joint venture with AWAC generated significant cash flow for Q1FY21 and contributed $62mn to AWC.

FY20 Financial Highlights: The company has registered a decline in revenue to US$0.1mn in FY20 against US$2.5mn in FY19. The company has posted a decline in profit to US$146.6mn in FY20 against US$214.0mn in FY19. AWC has seen a decline in its cash and cash equivalent position to US$10.4mn in FY20 against US$15.2mn in FY19.

Alumina Production from AWAC (Source: Company Reports) 

Key Risks: AWC incurred its costs in Australian dollar but reported its sales in the US dollars. Thus, strong movement in the Australian dollar may impact the profitability of the company severely. The company is exposed to climate change risk for its operations. Thus, any adverse climatic conditions may lead to financial losses for the company.

Outlook: AWC expects a growth of 7% in FY21 due to revival of aluminum consumption which was contracted in FY20 to 5%. On the back of rebound in China’s economy at later stage of 2020, the company expects a revival in Aluminum prices and production. 

Valuation Methodology: P/E based Relative Valuation Method (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: The stock of AWC gave a return of ~-1.37% in the last one month and a return of ~4.97% in the last three months. The current market capitalisation of AWC stands at ~$5.26bn as of 11 May 2021. The stock is currently trading above the average 52-weeks’ price level range of ~$1.345-~$1.960. On the technical analysis front, the stock has a support level of ~$1.509 and a resistance of ~$2.077. We have valued the stock using a Price/Earnings multiple-based illustrative relative valuation method and arrived at a target price of high single-digit upside (in % terms). We believe that the company can trade at a slight premium as compared to its peer median, considering a decline in its non-current liabilities as on 31 December 2020 and an increase in Aluminum prices in Q1FY21. For this purpose, we have taken peers OZ Minerals Ltd (ASX: OZL), Alkane Resources Ltd (ASX: ALK), Mincor Resources NL (ASX: MCR), to name a few. Considering a decline in non-current liabilities, expectations on revival of aluminum consumption owing to rebound in China’s economy, current trading levels, and valuation, we recommend a “Hold” rating on the stock at the current market price of $1.795, down by ~1.102% as on 11 May 2021.

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

Note: 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.

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