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Valuation The Issue For Pilbara Minerals

Small Caps | Oct 27 2022


A solid first quarter has not been enough for analysts to find upside value in Pilbara Minerals.

-Pilbara Minerals delivered a solid first quarter, beating production and shipment forecasts
-Some analysts found realised pricing a miss, relative to peers
-Analysts largely agreed the stock presents limited upside at current valuation

By Danielle Austin

Pilbara Minerals ((PLS)) has made a solid start to the new year, reporting spodumene production of 147,000 tonnes and shipments of 138,000 tonnes during the quarter, 13% and 5% higher than consensus forecasts respectively. Full year guidance was maintained, and lowering spodumene concentrate to 5.3% should benefit higher recovery and production. 

Price realisation of US$4,266 per dry metric tonne may disappoint the market in comparison to prices achieved by peers. Pilbara Minerals’ contract pricing lags peers, but with legacy contracts coming to a close the company is undergoing pricing reviews which may drive a price increase in the December quarter. The company remains well leveraged to lithium pricing, which continues to outperform despite a deteriorating global backdrop. 

The Ngungaju project reaching nameplate capacity in the quarter contributed to Pilbara’s strong output, and the company closed out the quarter with net cash of $1.2bn. Capturing downside margins, as per peers in recent quarters, could provide some upside. 

Brokers look for valuation justification

The five FNArena database brokers which cover the stock largely did not find the first quarter result to be enough to justify a high valuation relative to peers, although longer term value remains. Macquarie stands out as the only equivalent Buy rating, with the remaining brokersnow  all equivalent Sell-rated. An average target price of $4.07 results from a range of $2.60 to $5.90. 

Macquarie (Outperform, target price $5.90) found Pilbara's first quarter a strong start to the year. Production and shipments were 13% and 6% ahead of Macquarie’s forecasts respectively, and despite lagging peers the broker found price realisation solid. Pilbara Minerals remains Macquarie’s preferred lithium producer. 

By comparison, Credit Suisse (Underperform, target price $2.60) found realised pricing to be behind the curve. The broker feels it would take higher for longer pricing to justify the current valuation, or potential upside, estimating spot pricing would need to be retained for more than three years to justify the share price. Credit Suisse finds Pilbara Minerals’ comparatively expensive.

While describing the first quarter operational performance as solid, particularly in comparison to peers, Citi (Sell, target price $4.60) did downgrade its rating from Hold to account for a 160%  share price increase over the last year. Citi sees no major catalysts to drive down lithium prices near-term, but notes supply looks to increase medium-term. A higher spodumene price deck drove upgrades to earnings forecasts. 

Both UBS (Sell, target price $3.05) and Ord Minnett (Lighten, target price $4.20) found the operational performance in line, and both were impressed by Pilbara Minerals’ ability to generate cash flow. Ord Minnett found the closing cash position impressive, and expects it sets the company up for a positive capital management update this quarter. While the broker notes this could be a positive catalyst, it finds much of the upside from potential capital management is already priced in, and has downgraded to Lighten from Hold.

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