PILBARA MINERALS LTD (PLS)
Funded for construction
Pilbara Minerals Ltd (PLS) recently announced a A$95m equity raising ($80m
placement and $15m underwritten SPP). Combined with the debt raising and
cash on balance sheet, PLS has A$265m of facilities. We estimate that the
total capital requirement remaining is $220m, plus A$30m working
capital/liquidity reserve, for total capital of $250m. Consequently, PLS is fully
funded for construction of Pilgangoora and it appears PLS has around $15m
excess cash to pursue study work on expansions or downstream processing.
We note additionally, General Lithium should contribute A$18m based on
previous announcements, although there have been delays in other sectors
for outbound approvals for Chinese investment and we don’t dilute for it.
Debt terms
In addition to the $95m equity raise, PLS has also raised a US$100m bond.
The key terms are 5 years duration, 12% interest rate, principle repayments
begin in year 4, ability to buyback at small premium (1-3%) in year 4 (unless
earlier on market), a requirement to buyback upon change of control and a
liquidity reserve (we assume ~A$30m cash balance). Most of the terms are
within expectation, except the interest rate which is higher than we had
assumed. The higher interest rate has a small negative impact on our
valuation. On our estimates, PLS generates ~$230m EBITDA in FY19, and
hence can quickly build a cash buffer to repay the bonds when they can be
bought back around June 2020 (based on capitalised interest, we estimate
buyback price ~US$145m).
Model changes
We have deferred production to the end of FY18, which means our FY18
earnings estimates have been lowered significantly. Our FY19 estimates are
barely changed though. The higher interest costs and larger capital raise
negatively impact our valuation, although there remains considerable upside.
Maintain Speculative Buy
We maintain our Speculative Buy recommendation. We have a 80cps twelve
month price target, which implies ~5.9x FY19 EV/EBITDA based on peak net
debt of ~A$100m in May 2018. At the current share price, we estimate PLS
trades on 3.0x FY19 EV/EBITDA (peak debt). The key risk is spodumene
selling prices. Note, PLS is somewhat protected by its pricing mechanism
which we believe provides support at ~US$300/t. At such prices, PLS could
still generate a margin from the tantalum credits. At US$450/t, our valuation
would be ~31cps, suggesting PLS is priced for spodumene prices to fall
significantly from current ~US$850/t, and does not factor in a “stronger for
longer” scenario (our spot valuation is $1.05).
We have no doubt that eventually lithium will be oversupplied, but whether
that happens in 2018 or 2025 is not clear given the range of outcomes
possible for demand. PLS will generate significant cash flow at current prices
(when it is in production) and hence spodumene prices only need to stay
strong for a relatively short period to generate significant cash balance.
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