Pilbara Shares Up 1.3% Despite 86% Profit Plunge. Here's Why

Investors are eagerly looking for more insights into the outlook of the lithium market and the company's business prospects, as well as the reasons behind the stock price's rise following the disappointing financial results.

● Revenue and Profit: In FY 2024, Pilbara recorded a revenue of $1.25 billion, a decline of 69% compared to the previous year. This decrease was primarily attributed to the downward trend in lithium prices. During the reporting period, the company's average estimated realized price for spodumene concentrate dropped by 74% to $1,762 per dry metric tonne (CIF China) on a ~SC5.3 basis. As for profit, Pilbara's EBITDA of $538 million was 84% lower than the same period last year, mainly due to lower realized prices. However, lower total costs and higher sales volumes partially offset this decline. The EBITDA margin remained strong at 43% for the period. The underlying profit after tax and statutory profit after tax also experienced significant decreases of 86% and 89% respectively.

● Production and Sales: Pilbara's spodumene concentrate production increased by 17% to 725.3 thousand dry metric tonnes (dmt) in FY 2024, compared to the previous year. This figure also exceeded the guidance range of 660 kt to 690 kt for the Pilgangoora project in the 2024 fiscal year. Sales also saw a 16% increase, reaching 707.1 kt (FY23: 607.5 kt). The Pilgangoora expansion plan is progressing as scheduled, with the P680 Project's crushing and ore sorting facility commencing commissioning in the June Quarter. The P1000 Project is also progressing on schedule and within budget.

● Cash Flow and Financing: As of the end of June, the company's cash margin from operations significantly declined by 86% to $513 million, mainly due to the decrease in lithium prices. The cash balance for the current fiscal year was $1.626 billion, a 51% decline compared to the previous year. This decline was primarily caused by $763 million in income tax payments, $493 million in increased capital expenditures, and $421 million in dividend payments made at the end of the 2023 fiscal year. However, Pilbara Minerals has recently secured credit approved commitments from a group of domestic and international banks for a new $1 billion debt facility. The finalization of transaction documentation by mid-October, repayment of existing debt facilities, and other customary conditions precedent are necessary for the facility to be executed.

● Proposed Acquisition of Latin Resources: Pilbara Minerals announced the implementation of a binding agreement to acquire Latin Resources in early August, a move that comes as a counter-cyclical strategy amidst the downward trend in lithium prices. This acquisition will enhance the company's business and expand its portfolio with an additional 100% ownership of a hard-rock lithium asset, further solidifying its lithium resource reserves. By structuring the deal as an all-share transaction, Pilbara Minerals allows Latin Resources shareholders to participate while effectively maintaining the company's balance sheet capacity and liquidity.

Regarding the FY2025 guidance, the company anticipates Spodumene Concentrate to range from 800,000 to 840,000 dmt, with a grade of approximately 5.2%. This projection considers the integration requirements of two significant brownfields circuit expansions, namely the P680 crushing and ore sorting facility, and the P1000 processing facility.

The total capital expenditure for this period is expected to fall within the range of $615 million to $685 million from $865M of spend in FY24, with $240 million to $267 million allocated to Infrastructure and Projects. These investments are aimed at supporting the expanded mining volumes of P680 and P1000, enhancing operational efficiency, and upgrading infrastructure. Notable projects include the development of new tailings facilities, the construction of new access roads, the establishment of new warehouses, and the creation of new workshops.

The company's stock price has actually risen by 1.3% after the release of weak financial results, which can be attributed to the following factors:

Firstly, the company's stock price has already experienced a significant decline of over 20% this year, while the S&P/ASX 200 Index has risen by 6.5% during the same period. This suggests that the impact of the decline in lithium prices on the company's performance may have already been reflected in the stock price.

In addition, Pilbara Minerals, as a representative of lithium prices, holds a strong position in the industry as a leading operator with low operating costs and robust operational capabilities, as well as a prudent capital allocation strategy and a relatively strong cash flow buffer and balance sheet.

Furthermore, some perspectives indicate that the crowded short positions in Pilbara Minerals' stock are also one of the factors limiting further decline in its stock price. As of August 20th, the short interest in the stock reached 21.4%, making it one of the most shorted stocks on the Australian Securities Exchange. This is because some investors see the company as a proxy for the lithium market and short Pilbara Minerals as a way to bet against lithium pricing. In this context, whether it is profit-taking by short sellers or short squeezes triggered by rising stock prices, both could have a positive impact on share prices.