Pilbara Minerals has new ways to sell lithium: Macquarie and Cannacord reaffirm Buys

Pilbara Minerals (ASX: PLS) shares fell for five straight sessions through to Monday, down -13.4% to a one month low. The turbulence brings into question whether or not lithium sector has peaked and tests the resolve of its faithful investors.

Earlier this week, Pilbara Minerals announced the sale of 15,000 tonnes of spodumene for delivery in the March quarter which uses a new commercial model based on lithium hydroxide prices. Under the agreement, the company will receive the value of the lithium hydroxide price less a prearranged tolling fee and other costs.

As Pilbara Minerals notes, the agreement "has the potential to be highly favourable to the company and opens the door for future tolling arrangements."

"This marks the first tolling arrangement for PLS and shows another avenue to market for PLS to extract value from its product," said Canaccord Genuity in a note on Monday.

Macquarie's tolling takeaways

Macquarie retained an OUTPERFORM on Monday with a $7.50 target price. The key takeaways from the tolling agreement include:

• Largest spot sale: The 15,000 tonne cargo of spodumene concentrate represents the largest spot sale to date, relative to the BMX cargos of 5,000 tonnes each.

• Higher realised prices: "The implied spodumene prices of US$8,304/t (SC6.0% CFR) through tolling are materially higher than the potential achievable prices of US$6,268/t on the BMX platform."

• More sale avenues: PLS noted that the tolling arrangement was more value-accretive than selling via its BMX platform and indicated towards a mix of spot sales, BMX auctions and toll treating for future unallocated volumes.

"On our forecasts, the company is trading with impressive free cash flow yields of 22% and 21% for FY23 and FY24, respectively," notes Macquarie.

Canaccord: Empty handed BMX bidders

Cannacord also retained a BUY rating on Monday with a more moderate price target of $5.00. Some interesting observations from their note include:

• Tolling over BMX: "The tolling arrangement may place those depend on these volumes in a tougher position, particuarly if they thought they may access lower cost material."

• Closing premiums: The BMX auction initially posted significant premiums vs. Asian Metals market pricing (more than 60% at the first four auctions). "Hence the reporting of these auctions closed a gap in the markets understanding of the underlying shortage ..." Now, the gap between Asian Metals and MBX auction results has largely closed (3.5% premium in last four).

• The end of auctions: "In our view, the tolling arrangement shows PLS can adapt to the market and leverage its market position and potentially signal the end of frequent BMX auctions."

At current share prices, Cannacord estimates that the equity market is pricing long-term spodumene prices of US$1,575 a tonne.

"Near-term earnings would be impacted (at US$1,575 a tonne); however, we would still see value given our US$1,500 a tonne long-term assumption."

"Conversely, if spot prices were to hold until the end of FY23, its cash balance would grow to $3.5bn (from $2.2bn at the end of December quarter 2022) and we estimate there could be 22% upside to FY23 EBITDA."

Pilbara Minerals 12-month price chart (Source: Market Index)