Catching up with weekend stock market news...PLS a toddler slowly growing to become a 'Big Bro'..
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
MT) rising today.