Pilbara Minerals: The Top Lithium Stock For Investors Riding The EV Wave (OTCMKTS:PILBF)

Thesis

Pilbara Minerals (OTCPK:PILBF) is a leading independent hard rock lithium operator that is well-positioned to capitalize on the increasing demand for lithium and the transition to electric vehicles. The company’s strong cash position and low production costs make it well-positioned for future growth, as both its sales and earnings have increased significantly. In addition, Pilbara’s emphasis on innovation, including the creation of its Battery Material Exchange (BMX) platform, will enable it to continue growing and to remain ahead of the competition.

Company Profile

Pilbara Minerals is an Australian hard rock miner specializing in the production of lithium, a crucial component in the production of batteries for electric vehicles. The company operates two properties in Western Australia, the Pilgangoora Project and the Ngungaju mine, both of which are fully ramped and approaching nameplate capacity. Pilbara is also working on several other projects, such as the expansion of the Pilgangoora plant and a joint venture with POSCO Holdings that will increase midstream capacity. In addition to its operations, Pilbara is well-known for its commitment to innovation, including the creation of its Battery Material Exchange (BMX) platform, which enables the company to sell its spodumene concentrate (SC5.5) at high prices via an online auction system.

Recent Performance

In recent years, both sales and profits at Pilbara Minerals have increased dramatically. The company’s latest quarter (Q1 FY23) generated gross sales of $1.037 billion, owing to the sale of 138,249 dmt of spodumene concentrate and 45,041 dmt of middlings product. This nearly surpassed sales for the entire fiscal year 2022. The company’s cash position increased by $783,7 million, or 133%, to $1.375 billion.

In addition to its solid financial performance, Pilbara Minerals has low production costs, which will help it maintain its competitive advantage as lithium demand continues to increase. The company expects production costs to be between $635-$700/dmt for the upcoming fiscal year, which is very reasonable compared to the average realized selling price of ~US$2,382/dmt (CIF China) (A$3,295/dmt) that the company received for its ore in the most recent fiscal year.

Innovation and Advantage in the Market

One of the primary ways in which Pilbara Minerals has distinguished itself from its competitors is through its emphasis on innovation. The company’s Battery Material Exchange (BMX) platform is a good example of this. The platform is an online auction system that allows Pilbara to sell its SC5.5 to the highest bidder at a premium price. The platform has garnered record bids for SC5.5, and it has the potential to be expanded in the future to include other lithium products.

Pilbara Minerals has also focused on innovation in other areas, in addition to the BMX platform. The company has developed a proprietary ore sorting technology that allows it to improve the grade of its ore, which will help to reduce production costs and improve profitability. In addition, Pilbara has been developing a proprietary lithium hydroxide process that will enable the company to produce lithium hydroxide, a key component in the production of electric vehicle batteries, at a lower cost than its competitors.

The Company Enjoys a Very Robust Lithium Demand Outlook

As the world transitions to electric vehicles, lithium demand is expected to increase by around 20% per year between 2020 and 2030. In 2020, the total demand for lithium worldwide amounted to 263,000 tonnes of lithium carbonate equivalent. It is forecast that by 2030 this quantity will increase to approximately 2 million tonnes.

Pilbara Minerals is well positioned to capitalize on this trend.

Recent Pullback Likely To Be a Buying Long-Term Opportunity

The stock price peaked at 5.66 AUD in October and dropped to an intra-month low of 3.59 AUD in December, representing a 37% drawdown.

The stock price fall is most likely the result of the recent weakness in lithium prices.

Pilbara Minerals published its most recent auction price for two cargoes of spodumene concentrate – the lithium chemicals feedstock sought by Chinese non-integrated lithium producers primarily refiners.

On its Battery Material Exchange platform, the Australian miner accepted an offer of $8,299/dmt (adjusted to a 6% Li2O China supplied basis), a 3% fall from the winning price in mid-November.

As a leading signal for future spodumene pricing, the fact that this is a reduction compared to the last auction is attracting considerable market interest. However, we do not think that we are at a turning point for lithium prices. This is more likely a consolidation within a long-term bull trend than an inflection point. The bull-run since 2020 has been unprecedented, and as such, the recent signs of easing tightness are likely to trigger some short-term price weakness.

What do we think about Pilbara Minerals’ valuation?

Although Pilbara Minerals came under selling pressure at the end of 2022, the stock price remains up about 12% over the past year, while it has outperformed most of its peers over the past three years. In this regard, it is fair to ask whether Pilbara Minerals is overvalued compared to its peers.

In our view, we view the valuation Pilbara Minerals as attractive. To gauge the relative valuation of the company vs its peers, we look at the price-to-earnings ratio. Based on the latest data available, Pilbara Minerals’ P/E is 21.37. If we compare the PE to its peers such as Mineral Resources, Sayona Mining, Allkem, or Lynas Rare Earths, we come to the conclusion that Pilbara Minerals’ valuation is attractive.

Importantly, the company has performed strongly from a fundamental perspective with an experienced management team (3.5 years on average among the leadership team). We have also seen relatively much more insider buying than insider selling over the past month, suggesting that insiders have been keen to buy the recent pullback of the stock price.

Overall, we believe that Pilbara Minerals constitutes attractive investment opportunity.

Risks and Factors to Consider

As with any investment, it is essential to consider the risks and uncertainties that may affect the performance of Pilbara Minerals. The potential for changes in lithium demand, which could be influenced by factors such as shifting consumer preferences, economic conditions, and technological advancements, is a significant risk to consider. In addition, Pilbara Minerals operates in a highly competitive industry and may face competition on the lithium market from other companies.

The possibility of operational issues, such as supply chain disruptions or technical problems at the company’s mines, is an additional risk to consider. Pilbara Minerals may also be subject to regulatory risks, as the mining industry is subject to a number of laws and regulations that may have an impact on the company’s operations.

Conclusion

Pilbara Minerals is a solid investment for investors seeking to increase their lithium exposure. The company’s strong cash position and low production costs make it well-positioned for future growth, as evidenced by its impressive growth in both sales and earnings. In addition, Pilbara’s emphasis on innovation, including the creation of its Battery Material Exchange (BMX) platform, will enable it to continue growing and to remain ahead of the competition. Although there are risks and uncertainties to consider, the potential for future growth and demand for lithium make Pilbara Minerals an excellent investment option for those seeking to profit from the shift toward electric vehicles.

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Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.