Pilbara Minerals (ASX: PLS) (OTCPK: PILBF) could be thought of as a very well thought out plan. It can also be described as a piece of blond luck. But whoever way around we think of it it’s still one of the great deals of all time. Note that this doesn’t in fact tell us much directly about the future. If it was planned and executed then we can have a certain confidence in the management, if luck then less so. But even that only changes probabilities for the future.
We’ve mentioned this before but it’s worth explaining properly about Pilbara: “The basic deal at Pilbara is that it's the result of one of the truly great bargains in mining industry history. Back in 2013 or so there was a run up in the lithium price. This meant more exploration, more mines tried to come online. One, within a company called Altura, got financed, went into production and then went bust. It went bust because the finance costs could not be covered by the now low - low because lots of mines got financed - lithium price. Pilbara bought that mine out of the bankruptcy and then, almost exactly then, the lithium price soared again. Pilbara has near 50% net profit margins on $2 billion of sales as a result. The timing was exquisite.”
Pilbara Minerals share price from Google Finance
The fuller story is told back here, but from the point of view of Altura, not Pilbara: “Output had been ramped up, a gross profit was being made. It was around and about breakeven before financing costs. It wasn't at nameplate capacity yet either. It's those financing costs that killed the corporate structure. They'd taken on too much debt to be able to outrun it at a time of low lithium prices.” They had in fact managed to get the mine into production. It was just the combination of their financing costs plus the then low lithium price that killed them.
If they’d been able to stumble on for another year - about - then they would have made a fortune. As it happened they couldn’t and so: “Pilbara Minerals (OTCPK:PILBF) has agreed to buy the lithium assets of troubled peer Altura Mining for $175M, in further sector consolidation on lithium recovery bet.” Buy a producing mine when the price of what is produced is low, ride that price into the stratosphere. And yes, that is still the main asset within Pilbara Minerals. The one that has it making 60% margins on a billion in sales. And thus a market capitalisation of $10 billion.
That purchase for $175 million. Heck of a deal there, heck of a deal.
