Pilbara Minerals Limited

PLS’s Share Tumbled Consecutively Second Day Above 6% Over Production Optimisation Update: The share price of Pilbara Minerals Limited (ASX: PLS) has shown weakness for the second consecutive day, where it declined by ~10% on June 17, 2019, and today, i.e., on June 18, 2019, it declined by over 6%. This might be attributed to the company’s recent announcement about its Pilgangoora Lithium-Tantalum Project production and sales update.As per the release, PLS continues to optimise its production at Pilgangoora Lithium-Tantalum Project. The company also mentioned that the delays in the commissioning, construction and build-out of Pilbara’s offtake customer chemical conversion capacity in China has resulted in constrained June quarter sales of spodumene concentrate.

Production at Pilgangoora would be softened during the months of June and July with the Company using this opportunity to undertake continued rectification of RCR defects, draw-down final product stocks, and complete further plant improvement works. Spodumene concentrate pricing has started softening, and it is presently priced in a range of around USD600-640/dmt CFR China (SC6.0 basis).

What to expect: Pilbara will be taking advantage of this period of reduced production by progressing RCR defect rectification works as well as other plant modification measures that ultimately are anticipated to lead to continued improvements in lithia recovery.While the market in China has softened because of the conversion capacity constraints, the company is confident in medium to long-term outlook with respect to the lithium market and underlying demand for battery-ready lithium chemicals.


March’19 Quarter Net Operating Cash Flow Data (Source: Company Reports)

March’19 Quarter Financial Performance: PLS reported net cash outflow from operating activities at $9.33 Mn in the quarter ended March 31, 2019. The net cash and cash equivalent on March 31, 2019 was reported at $103.8 Mn.
Lithium Outlook:The demand for the battery-ready lithium (Li) chemical stocks remains robust, which implies that the current weakness in Lithium spodumene concentrate market is because of temporary slow-down because of delays in the ramp-up of the chemical conversion capacity in China.

Lithium finds its major use in the lithium batteries which is used as a power source for a wide range of applications such as power station-domestic industrial storage, consumer electronics, etc.

Tantalum Outlook: The tantalum market happens to be very specific in size with the total global demand of ~1.7 K tonnes of tantalum metal per annum. The metal uses in the electronics industry, data storage, and telecommunications.It is also utilized in engine turbine blades, medical implants, and semi-conductors.

Stock Recommendation: Pilbara’s share is presently trading close to its 52 weeks low level ($0.570). Its current ratio for H1FY19 stands at 1.99x, which is better than the industry median of 1.87x, which implies the company is in a better position to address its short-term obligations than its peer group. Moreover, on the valuation front, its EV to Sales ratio stood at 16.7x as compared to the industry median of 167.9x. Hence, considering the aforesaid facts and current trading level, we recommend a “Hold” rating on the stock at the current market price of $0.595 per share (down 6.299% on June 18, 2019).
 

Galaxy Resources Limited

Trading Close to 52-week Lower Level: Galaxy Resources Limited (ASX: GXY) recently announced change in its director’s interest where John Turner acquired 10,000 ordinary shares at value consideration of $14,770, effective from June 14, 2019, taking the final holding to 65,000 Fully Paid Ordinary Shares and 500,000 Unlisted Options exercisable at $2.78 on or before June 14, 2020.

In its March’19 quarter highlights, GXY reported production of 41,874 dry metric tonnes of spodumene concentrate. Production in the month of March’19 was reported at 17,021 dmt, equivalent to an annualized run rate of over 200,000 dmt. The average cash cost was reported at US$453 per dmt for the period. At the end of the March’19 quarter, the company reported cash and liquid assets at US$285.3 million with zero debt.


GXY Production & Sales Statistics (Source: Company Reports)

What To Expect From GXY: As per the release, in Mt Cattlin, total spodumene production volumes guidance for Q2 FY19 has been given at 45,000 dmt to 50,000 dmt, whereas for full calendar year 2019, the production guidance is estimated to be in the range of 180,000 dmt to 210,000 dmt. 

Stock Recommendation: Galaxy Resources’ share is presently trading close to its 52 weeks low level ($1.355). Its EBITDA margin and net margin for CY18 stand at 35.3% and 97.6%, which are better than the industry median of 29.5% and 14.0%, respectively, implying decent fundamentals of the company than its peer group.  Its ROE for CY18 stands at 30.1%, which is better than the industry median of 12.2%, which implies the company has generated a better return to its shareholders than its peer group. Its current ratio for CY18 stands at 2.96x, which is better than the industry median of 1.67x. Moreover, on the valuation front, its EV to Sales and P/B multiple for TTM stand at 2.8x and 0.7x, lower than the industry median of 167.9x and 1.4x, indicating undervalued position at the current juncture. Hence, considering the aforesaid facts and current trading level, we recommend a “Speculative Buy” rating on the stock at the current market price of $1.370 per share (down 2.837% on June 18, 2019).  

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