Pilbara Minerals Limited (ASX PLS) is an Australian lithium-tantalum mining and production company.
The company operates the Pilgangoora mine, located in the Pilbara region of West Australia.
The company plans to capitalize on the rapidly growing lithium market as the world moves to electric vehicles (EVs) and renewables.
The company made its first spodumene concentrate (unprocessed lithium) shipment from the Pilgangoora site in April 2019.
The site has a 23-year mine life at 5 Mtpa.
Spodumene concentrate is converted to lithium carbonate or lithium hydroxide for use in battery components.
The market for lithium, expressed in lithium carbonate equivalent (LCE), is expected to become structurally deficit from 2025 onwards.
Further, lithium hydroxide is becoming the preferred option for energy-dense batteries, and Chinese demand is growing strongly.
This is a long-term advantage for PLS, though lithium prices have declined sharply in recent years due to oversupply.
In 2020, the coronavirus outbreak took a severe toll on the global economy.
Nonetheless, despite weak economic demand, in Q1 2020, Pilbara was able to produce decent results due to its successful production moderation strategy and efficient matching of stockpiles and product demand.
However, quarterly sales of 33,893 tonnes were below the guided levels of 35,000-50,000 tonnes.
As of March 31, 2020, the company had reserves of cash and cash equivalents of A$108 million.
Over the past five years, the company has significantly outperformed the ASX index by 96%.
Source – Google Finance
About Pilbara Minerals Limited (ASX PLS)
The company is primarily a lithium and tantalum miner/producer based in Australia.
The company’s most significant asset is the Pilgangoora mining site, which is one of the biggest lithium resources in the world.
Pilbara is currently in the process of implementing a three-stage expansion plan of its Pilgangoora project which will increase capacity from the current 2 Mtpa (Stage 1) to 7.5 Mtpa (Stage 3).
The company operates under the off-take business model, which involves the sale of future production before undertaking the significant capital outlay involved in mining.
Over the long-term, the company aims to be a major player in the global lithium supply chain.
PLS has a market capitalization of A$590 million.
In contrast, lithium pure-play competitors Altura Mining Ltd (ASX AJM) and Galaxy Resources Limited (ASX GXY) have market caps of A$197 million and A$346 million respectively.
Pilbara Minerals’ Production is Sold out to Top Chinese Buyers Who are Also Shareholders
Pilbara is a well-positioned company in the lithium hard rock mining space as the battery metal has a very positive future outlook.
Over the last decade, climate change and global warming have become major global concerns and spawned huge new industries around renewable energy and electric mobility.
In 2019, global EV sales topped 2.2 million vehicles whilst renewables made up 75% of all new installations.
This shift towards electric mobility and renewables has spurred strong demand for lithium, the market of which is expected to grow at 28% per annum this decade.
Source – Pilbara June 2020 Report
Given such a bright outlook for lithium and its ownership of large reserves of the metal, Pilbara’s off-take agreements are advantageous assets.
The company has agreements in place to sell 100% of its Stage 1 and Stage 2 production [subject to Final Investment Decision (FID)] to major players in the battery sector and lithium supply chain.
The pricing of the off-take sales is market-linked and based on domestic prices in China ensuring alignment of interests between the company and its customers.
The advance sales of future production take a lot of uncertainty out of the picture.
A significant additional advantage for the company is that four of its six off-take partners own sizeable equity in the company, thus ensuring the stability of demand.
All these factors combined with substantial cash reserves of A$108 million and debt of just 40% of assets make Pilbara an attractive company.
Decline in EV Demand a Potential Weakness
One potential weakness of the company is the recent sharp decline in EV vehicle demand in both China and the US – the largest EV markets globally.
In July 2019, the Chinese government announced its decision to halve government subsidies on EV vehicles and intention to completely phase out the subsidies by the end of this year. That decision had a substantially negative impact on EV sales.
Following the government announcement, EV sales in China suffered a 6-month long slump, ending 2019 lower by 4% YoY.
In a one-two punch, the coronavirus pandemic badly hit Chinese EV vehicle sales, which fell 27% as of last month, after being down as much as 77% in February.
US EV sales are also down about 40%-50%.
With a looming global recession, consumers are less likely to make large purchases such as cars and may be reluctant to try new technology (EV) compared to the traditional one (gasoline).
Since EVs are the largest use-case of lithium, this slump in demand for EV’s can pressure its prices and hurt Pilbara’s profitability.
Pilbara Expected to Ride Out Lithium Weakness and Emerge Stronger From Sector Consolidation
In the context of the coronavirus pandemic, Australia appears to hold China accountable and has requested an independent inquiry into the matter.
This request was not received well by Beijing and might have damaged the economic relations between the two countries.
Shortly after the inquiry request, China announced tariffs on barley imports from Australia and suspended multiple Australian meat import licenses.
Although China stated that its decision was mainly a trade response, some Australian politicians believe it is economic coercion aimed at strengthening China’s diplomatic position.
Given Pilbara’s massive exposure to the Chinese market, a deteriorating relationship between Australia and China might present a problem in the coming years.
Further, as seen below, the prices of lithium carbonate and lithium hydroxide have been declining in recent years and this has put pressure on producers across the world.
In Australia, Alita Resources (ASX A40) went into administration in September 2019 after offtake partner JBJ — a joint venture between Jiangxi and Burwill Holdings — stopped receiving shipments from Alita citing force majeure.
Nemaska Lithium Inc. (TSX NMX) filed for bankruptcy in December 2019 due to the fall in the price of lithium hydroxide.
Such failures leave China in greater control of the lithium supply.
There could also be more consolidation amongst Australian hard rock miners, but it is expected that PLS will ride out the trend and emerge stronger once prices bottom out, expectedly in 2020.
Pilbara Minerals’ Financials
We will compare Pilbara to Altura Mining (ASX AJM) and Galaxy Resources (ASX GXY).
Both these companies are Australia based pure-play lithium producers.
We will use the price-to-book ratio to compare valuations, total debt-to-equity to compare leverage, and total asset turnover to compare the efficiency of the company to its peers.
In terms of valuation, Pilbara is priced in between Altura and Galaxy has a P/B of 1.4 compared to 1.64 and 0.98 respectively.
Pilbara has a total debt-to-equity ratio of 41.47%, making it much less leveraged than Altura, but much more geared than Galaxy Resources.
When it comes to efficiency, Pilbara (0.11) looks very inefficient compared to Altura (0.29) and slightly inefficient compared to Galaxy (0.14).
It may be noted that PLS is currently in a moderated production phase due to a soft market.
However, the company took the opportunity to make plant rectification and improvements resulting in exceptional plant performance and lithium recovery.
Recoveries (at 72% – 78%) are now in line with plant design specifications.
Pilbara’s Stock May be Presenting A Long Term Opportunity
The stock price of Pilbara Minerals Limited (ASX: PLS), at A$0.26 is down nearly 80% from its peak of A$1.25 achieved in December 2017.
There is every expectation that lithium carbonate/hydroxide prices will finally bottom out in 2020 as marginal producers are squeezed out, and others cut back production.
Further, the long-term fundamentals of the EV/battery industry, and likely supply deficits of lithium, could prove positive for PLS.
The stock is currently facing resistance around the A$0.40 level, which will likely break once the lithium price starts to recover.
For a higher risk but higher potential upside return, PLS is holding up well at this level. For a lower risk but lower potential return, an established lithium price recovery and a break of $0.40 in the PLS share price would be prudent.
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