Lithium Watch – A Good Project but Poor Return

No track record but priced for success. That is the Pilbara Minerals story. Despite what they say, investors continue to show a preference for ‘trend’ over ‘team’ in making investment choices. The Pilbara Minerals definitive feasibility study released in the past week puts a A$709 million value on the Pilgangoora lithium project but the market value of the company is already $627 million implying a skinny 13% difference. The reward for investing in an unproven team at this stage of development appears inadequate. The company is anticipating an average annual EBITDA over the life of the project of A$121 million. That also sounds an impressively high number but anything less than a five times EBITDA multiple once in production would leave the company’s market value short of where it is now. Even a generous 6-7 multiple in four or five years (once the company is demonstrating it can deliver its targeted profits consistently) is, at best, only a 6% annual return. And that assumes no equity raising along the way for working capital, not an assumption with much historical support.