An impressive run of positive news including a major resource upgrade, an increase in the estimated size of its flagship project, a series of potential off-take deals and a recent price increase for its key product has prompted a top resource analyst to double his valuation for Pilbara Minerals (ASX: PLS).
Melbourne-based equity research group Beer & Co – which has had a flawless record over the past year, correctly predicting the stock’s rise from 2.5c in September 2014 to 25c today – has now issued a STRONG BUY recommendation, saying it will double from here to 51 cents.
And, if Pilbara is able to deliver its major project, the Pilgangoora Spodumene-Tantalite Project in WA, then Beer & Co analyst Pieter Bruinstroop says its valuation would be “over $1.00/share”. Pilbara is about to start production from its Tabba Tabba tantalum mine, located 75km south-west of Port Hedland in WA’s North West, and has recently bought out its joint venture to acquire a 100 per cent interest in this boutique operation.
Beer & Co says Pilbara is permitted to construct and commission the plant at Tabba Tabba, with the final permit expected in November allowing it to begin commercial sales.
It is projected to generate $18 million of EBITDA in its first year of operations – generating valuable cash to underpin the development of the much-bigger Pilgangoora spodumene-tantalite deposit. It is this much larger project which forms the main focus of Beer & Co’s new report, which says that a recent major resource upgrade to 52.2 million tonnes combined with an increased Exploration Target has underpinned a significant increase in the estimated size of the project.
“This makes PLS’s Pilgangoora the second largest hard rock spodumene deposit in the world, after Greenbushes, which has 120Mt in resources in December 2012,” Bruinstroop says.
“PLS’s previous resource estimate was in July. The rate of increases shows that it clearly has the potential to be the largest deposit in the world.”
Spodumene is a pyroxene mineral which is a valuable source of lithium for use in ceramics, glass, lithium-ion batteries, lithium grease, bi-polar pharmaceuticals and as a fluxing agent. Spodumene has a key advantage over other lithium source materials due to its ability to produce very high-purity lithium chemicals including lithium carbonate, lithium hydroxide and lithium sulphate. “Due to strong demand for lithium due to electric vehicles and emerging off-grid battery demand, coupled with supply uncertainties, PLS has signed MOUs for over 200,000tpa of Li2O concentrate,” Bruinstroop says.
“There could not be a better time for a small company to have significant spodumene resources,” he continues, going on to describe the market outlook as “an almost perfect storm favouring PLS”. “…there is growing battery demand and Li-ion batteries are the preferred technology, due to energy density and power per weight, as well as moderating costs. This demand is coming from portable consumer electronics (e.g. power drills) as well as emerging hybrid and electric vehicle demand and off-grid energy storage,” Bruinstroop says.
The report goes on to say that it has raised the forecast production rate from Pilgangoora from 1Mtpa to 3Mtpa. “Beer & Co believe that the production rate will be raised. We have assumed to 3.0Mtpa, which still leaves a very long mine life of about 20 years.” Beer & Co’s model forecasts that, by FY2018, the company could be generating profits up to $43 million on revenues of $148 million, rising to profits of $171 million on revenues of $450 million by FY 2022. “Beer & Co’s risked, base case valuation of PLS is now 51c/share, while the current share price has climbed to 25c/share.
“The major drivers of our increased valuation are increased throughput due to the significant increases in the volume of economic mineralisation at Pilgangoora and higher prices. “If PLS is able to deliver as we project, then our valuation would be over $1.00/share.”
Interview with Neil Biddle from Pilbara Minerals – Resources Rising Stars 2015
