Monsters of Rock: "Well timed" – how analysts reviewed Pilbara Minerals' latest lithium deal

Lithium prices are still in the doldrums
But analysts appear largely positive on Pilbara Minerals’ ‘bottom of the cycle’ M&A move on Latin Resources yesterday
Materials up as iron ore miners (dead cat?) bounce

Lithium prices copped another hit yesterday, with weak chemical pricing prompting lower bids according to price agency Fastmarkets.

That saw their spot 6% Li2O indicator drop US$25/t to fall under US$800/t for the first time in over three years to US$775/t.

It remains double the all time lows of ~US$390/t reported in October 2020, the lowest point of the last lithium downturn.

That moment presented an opportunity for some company-making counter-cyclical M&A.

Pilbara Minerals (ASX:PLS) and IGO (ASX:IGO) were the biggest beneficiaries, with Pilbara snaring collapsed neighbour Altura Mining on the cheap and IGO collecting a 49% share in Chinese lithium giant Tianqi’s then struggling Aussie lithium business, including almost 25% of the world-leading Greenbushes mine in WA’s South West.

Now PLS is back at it, having yesterday announced a $560 million all-scrip scheme deal to acquire Latin Resources (ASX:LRS).

How do analysts feel about the outlook here?

“Well-timed” M&A

Pilbara, the most shorted stock on the ASX, is one of the most covered companies in Australia and among the most traded stocks by Aussie investors.

Analysts have a range of views on the miner, many now rating the company above its current share price.

Argonaut has a $3.70 price target and buy rating on PLS, saying the deal was well-timed in an update to clients yesterday.

“The acquisition of Latin Resources is well timed as it is rare in our view for companies to execute material M&A at the bottom of a pricing cycle. A development of the Salinas project in Brazil would be material for PLS, adding ~30% to group production and providing a real alternative to the larger capital investment outlined for the P2000 expansion,” the Perth broker said.

“The potential to expand the Salinas development base case also exists. The Scheme Implementation Agreement is expected to become effective in late November 2024 and be implemented in early December 2024.”

Jarden analysts led by Ben Lyons cut their PT from $3.80 to $3.70 on the news, but still hold a buy rating at current levels.

“With SC6 spot prices of ~US$800/t trading well into the cost curve, we view an acquisition of LRS as judiciously counter-cyclical, whilst the use of PLS scrip preserves the strong PLS balance sheet and cash balance of A$1.6bn,” Jarden says.

“The addition of a second 100%-owned project, for modest consideration relative to PLS’s size, would add further optionality to the PLS portfolio and introduce competition for capital with the organic P2,000 project at Pilgangoora.”

Jarden is far more bullish on spodumene longer term than the current market.

“Further, it would increase the leverage to an eventual recovery in lithium prices, which remains our base case view (LT price US$1,400/t),” Lyons et. al. wrote.

Jarden estimates PLS is embedding a long-term price over 11 years of US$1290/t in the acquisition cost or US$1000/t if the mine life can be extended to 20 years with additional drilling and studies following a PEA released last year.

It says a key test of the quality of the deal will be in whether the NPV of the Salinas asset, which includes the more than 70Mt Colina deposit in Brazil’s Minas Gerais State, exceeds the roughly $590m price Jarden has ascribed to the deak, with corporate costs also forecast to increase by $15m.

“From our initial modeling, we derive an illustrative value for an 11-year mine life at Salinas of ~A$580-815m, assuming LT SC6 US$1,400/t, inflating the LRS PEA estimates for Capex and Opex by 35-50%, and applying a 12.5% discount rate,” Lyons and Co. said.

“Increasing the mine life to ~20 years, to account for the large resource increase post the PEA, increases our illustrative valuation to >A$1bn.”

Bell Potter meanwhile maintained a hold rating and cut its price target from $3.30 to $3.15 due to weak near term lithium fundamentals.

RBC’s Kaan Peker is also bullish on PLS, with a $3.80 PT, but sees limited operational synergies in the deal, suggesting it could be near-term earnings dilutive.

The deal seems to have other lithium stocks running hot today, with Pilbara rebounding from a more than 5% fall yesterday by lifting almost 3% and juniors like Sayona Mining (ASX:SYA), Wildcat Resources (ASX:WC8) and Patriot Battery Metals (ASX:PMT) rising today.

Iron on the fire

A potential dead cat bounce had iron ore stocks leading the materials sector higher despite more sadness in iron ore prices, which are sitting at levels not seen since late 2022.

Singapore futures were down 0.5% to US$92.90/t again today, with pig iron and crude steel output in China down 3.7% and 2.2% respectively YTD to July.

MySteel reported National Bureau of Statistics figures showing pig iron output was down 8% on the year in July.

It came as Fortescue (ASX:FMG) today turned first sod on a pilot plant to produce ‘green iron’ at its Christmas Creek mine in the Pilbara.

The materials sector was up 1.39% at 3pm AEST, and resting at 2.14% by the close of play.

On the flip side, Silver Mines (ASX:SVL) suffered a ~40% drop just weeks after running higher on a ~$30m convertible note funding deal with mining notaries including Rick Rule and Harry Lundin.

The Bingman Catchment Landcare Group were successful in having their appeal allowed on an application to cancel the development consent given to by the Independent Planning Commission for the Bowdens silver project, located 2km from the community of Lue and 30km from Mudgee in New South Wales.

A majority of the three judges on the appeal court found the development consent provided for Bowdens in April 2023 is void and of no effect because the impacts of a proposed transmission line for the project was not considered as part of the development application.

“Preparation and the submission of a new development application for the Project, including power supply options, are being considered,” the company said in an ASX statement.