Pilbara Minerals (ASX:PLS) Set To Capitalize On The Lithium Boom With Well-Timed Acquisition

Pilbara Minerals (ASX PLS)

Henry Fung

Henry is a co-founder of MF & Co. Asset Management with over 15 years of experience as a trader, investor and asset manager. Henry runs the Options Income Strategy and has a free 5-day options income strategy course you can take to learn how to use options to generate income.

September 2, 2021

Today we will look at why Pilbara Minerals shares (ASX:PLS) have massive growth potential through exposure to the lithium market in our PLS share price forecast.

We first looked at Pilbara Minerals shares in June 2020, when it was trading at just $0.26. Since then, the PLS share price has risen more than 750%.

Pilbara Minerals Ltd (ASX:PLS) is one of Australia’s biggest listed pure-play lithium mining players.

The company has lately been in the limelight due to the solid rally in its stock and its recent acquisition of Altura Mining for $175M.

The deal is a good fit for Pilbara Minerals because Altura’s Pilgangoora mine is adjacently located, making the acquisition easy to integrate and generate economies of scale.

Pilbara Minerals was also recently inducted into the ASX200, Australia’s flagship index.

The company’s stock has been having a great run being front-and-centre of the decarbonization megatrend, a thematic investor favourite.

At the current PLS share price, Pilbara Minerals shares are up 156% YTD compared to just 12.7% for the ASX200.

Pilbara Minerals (ASX:PLS) - PLS share price

About Pilbara Minerals Ltd (ASX:PLS)

Pilbara Minerals is an Australia-headquartered company engaged in lithium mining.

The company owns two mines in West Australia’s Pilgangoora region.

Pilbara Minerals currently makes two products, lithium spodumene, and tantalite concentrate.

Lithium spodumene, which is a key input in lithium-ion batteries, is the company’s core product and is the major source of revenues.

Pilbara Minerals currently has an annual capacity of 330ktpa, which the company expects to expand to 560ktpa-580ktpa by the middle of next year after bringing the Altura acquisition into full production.

At the current PLS share price, Pilbara Minerals shares have a market cap of A$6.54B.

Strong Sector Tailwinds, Lithium Demand to Grow 9-Fold by 2030

Pilbara Minerals shares biggest strength is the bright future of its core product, lithium spodumene.

Over the past few years, a confluence of factors such as better electric vehicles and a rise in climate awareness have created a modern-day gold rush for lithium.

Lithium is a key input in EV and electronics batteries due to its lightweight and high energy density.

Over the next few years, experts claim that lithium demand will almost certainly lag its supply, leading to a substantial price increase.

It is expected that lithium demand will grow 9-fold by 2030.

This is good news for lithium miners with high-quality assets such as Pilbara Minerals, as they will benefit from operating leverage, meaning their inflation-adjusted cost of production will remain the same while the price skyrockets.

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While the company currently has off-takes for the majority of its ex-Altura capacity, there is significant room for the company to boost its margins because it would benefit from lower operating costs from the Altura acquisition and increase production into a bullish lithium market.

In the March quarter, the company reported a per-ton operating cost of $383, while the lithium spodumene price is currently in the $880-$950 range, reflecting the profit potential of the company.

The company has also invested in renewable energy for its sites, reducing emissions and further lowering operating costs.

Further, the company has partnered with GLX Digital on Battery Material Exchange (BMX), an already-operational online lithium marketplace that will help the company expand margins by selling to poorly supplied regions.

On July 29, BMX held its maiden auction for a spot cargo of 10MT of spodumene concentrate, and the winning bid of $1,250/MT was substantially higher than expected as compared to the price of $1,000 achieved in a tender on July 23.

According to sources, the auction result represented tightness in the spot market, and that Pilbara’s new platform imbued price transparency into the traditionally “opaque” lithium market.

Strong Strategic Investors Among its Shareholders

Pilbara Minerals (ASX:PLS) also has very strong strategic investors that are leaders in the lithium supply chain.

The company counts CATL (the world’s largest battery manufacturer), General Lithium (China’s third-largest lithium manufacturer), and POSCO (one of the world’s largest steel companies), amongst its shareholders.

This aligns the company’s interests with some of the biggest players in the lithium supply chain.

Pilbara Minerals (ASX:PLS) - strategic partners
Source: Pilbara May 2021 Investor Presentation

Single Product Dependence a Potential Weakness

While the bright future of lithium is one of the company’s biggest strengths, its complete dependency on it, as a single product, is a potential weakness.

Given that experts have made it clear that lithium supply will almost certainly lag demand, substantial efforts are being made by companies and research teams all over the world to build high-performance batteries based on new chemistries.

Further, lithium is a very exotic metal and thus very expensive for grid-based energy storage and cheap vehicles/electronics, which is another reason why vigorous attempts are being made at designing battery chemistries based on abundant materials.

For instance, battery technology startup Form Energy collected a $240 million Series D funding round that included Breakthrough Energy Ventures as an investor.

Breakthrough is backed by investors such as Bill Gates and Jeff Bezos.

Form Energy’s first commercial product is a rechargeable iron-air battery capable of storing electricity for 100 hours at less than one-tenth the cost of a lithium-ion battery.

However, commercial validation is still a couple of years away.

Any innovative and successful technological breakthroughs in favour of lithium alternatives can damage Pilbara’s prospects.

Sizeable Opportunity To Strengthen Business Through Vertical Integration

Moving down the lithium supply chain is a strategic initiative that Pilbara is pursuing.

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Lithium spodumene is essentially lithium ore, which needs to be processed chemically into lithium hydroxide that goes into making lithium anodes for lithium-ion batteries.

The current lithium hydroxide price is more than $15,000/ton while the cost of processing spodumene into lithium hydroxide ranges between $2,500-$4,000/ton, depending on factors such as ore costs and transportation, etc.

Moving lower down the supply chain into spodumene processing could help the company significantly boost its margins, increase its pricing power and cater to a wider market.

Pilibara Minerals (ASX:PLS) has tied up with POSCO, which is one of the world’s largest steel manufacturers and a minority shareholder in Pilbara, to set up a downstream processing plant in South Korea under a JV structure.

Given that POSCO has significant industrial experience, a sizeable balance sheet, and long-standing relations with auto-manufacturers, this could be a very fruitful opportunity for the company.

It should be noted that this JV is still conditional for both companies and depends on Pilbara Minerals ramping up spodumene production in line with its schedule.

However, the company’s recent acquisition of Altura should make that easier.

The company plans to gain vertical integration in a phased manner, by first going mid-stream through the production of lithium salts in a JV with Calix, and then a complete downstream venture with POSCO later.

Pilbara Minerals (ASX:PLS) - strategic plan
Source: Pilbara May 2021 Investor Presentation

As mentioned above, decarbonization has created a modern-day gold rush for lithium.

Pilbara Minerals (ASX:PLS) Exposed to Geopolitical Risk

Until very recently, Australia was one of the biggest and most reliable geographies for lithium mining.
However, the recent developments in Afghanistan have changed that picture.

Afghanistan has been in the press lately for its massive lithium reserves that were estimated to be worth more than $1T in a 2010 study by the US Department of Energy.

Since then, the price of lithium has grown substantially and so has the value of the deposits.

Meanwhile, the US has ended its involvement in Afghanistan and withdrawn troops.

China has already stated that it is open to having talks with the Taliban and establishing diplomatic relations.

Given that China and Australia are currently in conflict over trade issues and that China is one of the largest battery producers in the world, the company might see lower interest from Chinese buyers in the years to come and depressed prices due to increased supply from Afghanistan.

This presents a potential threat to the company.

Pilbara Minerals (ASX:PLS) Financials

In FY21, Pilbara Minerals shares delivered very respectable performance despite the disruption caused by the pandemic.

It reported sales of A$175 million on a full-year production of 281kt, an EBITDA of A$21.4 million, and an average per ton operating cost of US$389.

Commenting on the results, the company said it witnessed a significant increase in demand during the second half of the year, and that it is now focused on ramping up production capacity.

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Over the year, Pilbara Minerals raised A$240.2 million through an equity placement to fund its acquisition of Altura.

The company currently has A$110M of debt and A$115 million of cash on its books.

Pilbara Minerals (ASX:PLS) - increase in production
Source: Pilbara FY21 Annual Financial Report

For FY22, the company has projected production of 460ktpa – 510ktpa and per ton operating costs of US$395-US$430 for 2022 and US$340 – US$375 for FY23 and beyond.

The company has a planned capital expenditure of A$60.6 million for FY22, of which A$34.6 million is for bringing the Altura mine into production, A$26 million is for expanding and improving the company’s existing operation, and the remaining for sustaining expenses.

Pilbara Minerals (ASX:PLS) - FY2022 Guidance
Source: Pilbara FY21 Annual Financial Report

The company has a long-term goal of reaching 580ktpa by the end of FY22, 680ktpa by the end of FY23, and a 1000ktpa by the end of FY24.

Pilbara Minerals’ Valuation

We compare Pilbara Minerals shares (ASX:PLS) to Orocobre (ASX:ORE) and Mineral Resources (ASX:MIN).

Both are mining companies with lithium as a major product and are listed and headquartered in Australia, thus making them relevant for comparison.

MetricPilbara MineralsOrocobreMineral Resources
Price/Tangible Book11.926.133.19
Asset Turnover0.230.070.71

At the current PLS share price, Pilbara Minerals shares are substantially more expensive than Mineral Resources on all fronts and also less efficient in terms of asset turnover.

However, Mineral Resources is a much larger company with businesses other than lithium mining including iron ore and mining services.

It also does not have Pilbara’s potential for growth.

Compared to Orocobre, at the current PLS share price, Pilbara Minerals shares are cheaper in terms of Price/Sales, a number which will grow even starker as Pilbara Minerals ramps up its production over FY22.

Further, though Pilbara Minerals is more expensive in terms of Price/Tangible Book, Orocobre has its lithium operations in Argentina, where sovereign risk is substantially higher than Australia.

Pilbara Minerals is also more efficient than Orocobre with assets as shown by its higher asset-turnover ratio.

This is a very important metric in a capital-intensive business such as mining.

Pilbara Minerals (ASX:PLS) Poised To Take Advantage of Growing Market

Pilbara Minerals is in a sweet spot given that it will sell its rising production into the tightening price regime for lithium.

Its innovative online platform for selling its production could further lace margins with more efficient price discovery.

Moreover, the nicely-timed acquisition of Altura may pay off in spades in terms of higher sales, cost synergies, and improved free cash flow.

Meanwhile, the climatic compulsions for EVs and renewable energy storage for stationary applications, and thereby lithium, continue to reinforce every day.

At the current PLS share price, Pilbara Minerals shares have been on a very strong uptrend. It may be prudent to wait for pullbacks before considering taking a long term position in the stock.

Are you still looking for the best stocks to buy in 2021? We’ve put together a free report on 5 stocks that we think are the best buys on the ASX right now. Download it instantly here.

This is general advice only. MF & Co Asset Management has not considered your personal financial needs, objectives or current situation. This information is not an offer, solicitation, or a recommendation for any financial product unless expressly stated. You should seek professional investment advice before making any investment decision.

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