Pilbara vs Mineral Resources: Which lithium miner comes out on top?

Despite the downturn in lithium prices, low-cost producers like Pilbara Minerals (ASX: PLS) and Mineral Resources (ASX: MIN) are sustaining steady cash flows, robust operational performances and progressing key growth projects.

Resilience might be one thing – But lithium prices are still down around 80% in the past twelve months. Which means the results will contain some shock value as miners cycle through sky-high prices from 2022-23.

While the lithium rout is far from over, both Pilbara Minerals and MinRes have committed to major growth projects over the next couple of years. In other words, both companies are building up a substantial amount of leverage should lithium prices recover.

Hendrik Bothma from Katana Asset Management believes MinRes is the front-runner in terms of growth. Not only does the company plan to grow its lithium production by more than five-fold by FY28, it has similar ambitions for its iron ore production and mining services business.

In this wire, we discuss the recent half-year results of both lithium heavyweights, why both businesses still have some wiggle room amid depressed lithium prices and why MinRes' growth engine is just getting warmed up.

Pilbara Minerals 1H24 results

• Spodumene production up 4% to 320,200 tonnes

• Average realised spodumene price down 67% to US$1,645 a tonne

• Revenue down 65% to $2.18 billion

• Underlying profit after tax down 78% to $273 million

• Cash balance of $2.1 billion

• No interim dividend

MinRes 1H24 Results

• Revenue up 7% to $2.51 billion

• Underlying EBITDA down 28% to $674.9 million

• Earnings per share down 35% to $2.72

• Interim dividend down 83% to 20 cents per share

• Cash balance unchanged at $1.38 billion

Note: The interview took place Thursday 22 February 2024.

1. In one sentence, what was the key takeaway from these results?

Generating cash flow despite a near 80% drop in spot lithium prices.

2. Were there any major surprises in these results that you think investors should be aware of?

An area of focus for both companies heading into the result was how much cash flow, if any, they can generate at current prices. Spodumene prices are currently sitting around US$850 a tonne, down from roughly US$7,500 a year ago.

MinRes surprised with free cash flow nearly 40% above consensus, demonstrating the resilience of a growing and well-diversified business.

PLS on the other hand reported a negative operating cash flow of around $320 million, which missed expectations. But this was largely driven by a $870 million tax payment. So excluding that, they did generate positive cash flow.

For comparison, PLS reported a FOB unit cost of production of US$450 a tonne, which maintains a healthy margin over the current spot price of US$850 a tonne. MinRes reported FOB costs of US$550 a tonne at Mt Marion and US$570 at Wodgina.

3. Would you buy, hold or sell these stocks on the back of this result? If you could only buy one of these stocks, which would it be and why?

Rating: BUY on MinRes, HOLD on Pilbara Minerals

Both are fantastic companies and we currently hold both in the portfolio. Despite being one of the best pure-play lithium businesses globally, we trimmed PLS heading into the result, given their 100% reliance on lithium.

Last time lithium was at US$850 a tonne, PLS was trading below $1.00. There are key differences at the current state – They’re a much bigger producer now and have over $2 billion in cash.

MinRes is definitely the one we would buy here. They have four, soon to be five business units and hence are not as dependent on lithium as PLS. The company is at a very interesting stage of their growth and we don’t think the market has quite priced in just how much growth they have over the next four to five years.

Their mining services contracted tonnes is set to triple. Lithium production is forecast to grow more than five times. Iron ore production at Onslow will also have almost five-fold output. They’ve also established a new energy division to tap into the highly prospective Perth Basin. The strength of these business units was evident in today’s result and it's got a material growth trajectory ahead of it.

Source: MinRes half-year results presentation

4. What’s your outlook on these stocks and the sector over the year ahead?

The outlook for MinRes is positive given their growth. But more broadly speaking, the outlook for both companies really depends on your view of where lithium prices are headed.

We know prices have to recover at some point. They’re just too low at current levels given global demand and supply dynamics. Albemarle noted in their quarterly report last week that around 200,000 tonnes of global LCE production have higher costs than the current spot price. It’s hard to see any incentive for new production to come online unless prices rise meaningfully from where they are now.

Recently, we have seen some volatility in spot prices. Earlier this week, there was speculation that China’s CATL shut their mine and yesterday, Chinese lithium futures briefly hit limit up on reports that China will reduce production due to environmental issues.

The question is really ‘Have we seen a bottom?' This can be hotly debated, time will tell but I certainly think we’re close.

5. Are there any risks to these companies and the sector that investors should be aware of?

The key risks for both companies are project execution and a prolonged lithium price recovery. We know lithium prices will recover at some point but the timing is up for debate.

Both PLS and MinRes have growth projects they have to deliver on. There are some concerns over MinRes’ balance sheet, which is also a risk. They currently have $3.5 billion in net debt and a heavy CAPEX cycle ahead. We feel comfortable with that as management has proven they can manage this level of debt and have many levers they can pull to deleverage debt. Most notably a potential 49% sell down of their private haul road at Onslow could unlock around $1.5 billion.

6. From 1-5, where 1 is cheap and 5 is expensive, how much value are you seeing in the market right now? Are you excited or are you cautious about the market in general?

Rating: 3

I think we’re expensive following the 13% rally over the past four months but I’m happy to add on any weakness. The forward PE for the ASX 200 currently sits at around 16.5 which isn’t too far from the long-term average.

I do think it’s harder at the moment to identify value at a sector level. The sectors which should be doing well, have done well and it’s priced in, and vice versa. But you can still find value with a traditional bottom-up approach.

• Read the announcement – PLS FY24 Interim Financial Results

• View the presentation – PLS FY24 Interim Financial Results Presentation

• Read the announcement – MinRes FY24 half-year results

• View the presentation – MinRes FY24 half-year results presentation

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