Why brokers think Pilbara Minerals is too expensive

On Friday, WA-based lithium miner Pilbara Minerals (ASX: PLS) released its March quarter production and activities report. For the most part, it appeared to be a clean result, with spodumene production and sales up slightly, and the key P680 and P1000 projects on schedule and budget.

The elephant in the room was the 27% decline in quarter-on-quarter revenues, and a whopping 70% decline year to date – a result of similar-sized drops respectively in the price realised for the company’s products.

But, if you’re reading this, you already knew lithium minerals prices, particularly the spodumene Pilbara produces, cratered in 2023. This sort of stuff sounds bad in the headlines, but it has already been factored in by the market.

So then, the real question is what key titbits of information in Pilbara’s quarterly report weren’t already baked in? What surprised the all-important research analysts at the major broking houses in a good way or bad way, and where do they think the company's share price is headed next?

Good news! We’ve got all the dirt on Pilbara’s latest results from the most important brokers in the land. Here’s a lowdown on each broker’s views, along with their rating and price target.

Bell Potter – Rating HOLD, Price Target $3.60

• Notes Pilbara’s execution is “disciplined”
• Now forecasts a return to positive free cash flow (FCF) in FY25 due to better market sentiment and “operational enhancements delivering increased production volumes”
• Earnings per share (EPS) forecasts are adjusted by: FY24: +22%; FY25 +7%; FY26 unchanged
• Notes “PLS is a large, liquid and clean exposure to global lithium fundamentals and sentiment”, but shares are “fully valued at current levels”.

Citi – Rating SELL, Price Target $3.60

• March quarter report was “more or less as expected”, but an 8% drop in shipments was worse than the broker’s forecasted 3% fall
• Pricing was lower than expected, the rise in costs was in-line with expectations, and the cash balance was lower than expected ($1.8 billion less than the $2.0 billion forecast)

CLSA – Rating UNDERPERFORM, Price Target $3.90

• Broker downgrades rating from OUTPERFORM and lowers price target from $4.00

Goldman Sachs – Rating SELL, Price Target $2.80

• Suggests Pilbara’s ability to capture recent improvement in the spodumene price is “likely limited” because around 90% of the company’s FY24 and FY25 production is committed to binding offtake agreements – which will result in a “small number of auctions”
• Notes that Pilbara’s net cash has nearly halved over the last six months to $1.4 billion in net cash. CAPEX and pricing challenges, plus already deferred non-essential spending, means the broker sees a prospect of a FY24 final dividend as “increasingly unlikely”
• Accounting for spending up to the end of Beyond P1000 expansion, net cash is expected to trough at around $800 million to $900 million
• Pilbara trades at a premium to its peers at 1.2 times net asset value (NAV) compared to its peer average of 1.05 times

JP Morgan – Rating UNDERWEIGHT, Price Target $3.10

• Cites valuation for downgrade in rating from NEUTRAL. Price target is lowered from $3.25

Morgan Stanley – Rating UNDERWEIGHT, Price Target $3.30

• An “in-line” result for production and pricing, but a miss on costs (at $675/t compared to broker’s forecast of $641/t)
• Inventories are expected to rise to 73kt due to lower shipments, broker notes this is a record level of inventories for the company, and as production is ramping up

Morgans – Rating HOLD, Price Target $4.10

• Broker transfers rating from prior ADD and retains price target at $4.10

UBS – Rating SELL, Price Target $2.70

• Production was “in-line” with expectations, but sales were 7% below expectations
• Production is on track for “the high end of FY24 guidance of 660-690kt”, which compares to the broker’s forecast of 678kt and market consensus of 681kt
• Realised prices were 17% better than expected, but doesn’t include adverse quotational period adjustments, “all but wiping out the revenue line” for the quarter
• The company “continues to execute well” on production and growth plans, but the broker just can’t get past the valuation, “it continues to trade at a premium to our NPV” (NPV = net present value), they note

Pilbara Minerals broker consensus

Based upon the above individual ratings and price target, let’s calculate a Pilbara Minerals’ broker consensus. I like to assign a value of 0 to any rating better equivalent to a HOLD/NEUTRAL, a +1 to any rating better, and a -1 to any ratings worse. If the average rating is +0.5 or greater, I call the consensus rating a BUY, and if the average rating is -0.5 or worse, I call it a sell.

On this basis, Pilbara Minerals’ average score is -0.75 giving it a consensus rating of SELL.

The price target is a little easier. The average price target for Pilbara Minerals among the brokers sampled is $3.39, marginally lower than the average price target of $3.44 prior to the March quarter update. If you prefer, Pilbara Minerals’ median price target rose slightly from $3.40 to $3.45.

Based upon Pilbara Minerals’ price at the time of writing of $3.86, this implies an 11% downside to the brokers’ average price target and a 10.6% downside to their median price target.

This article first appeared on Market Index on Monday 22 April 2024.