The IGO Limited (ASX: IGO) share price is edging lower in Thursday's session and is currently down 1.40% at $11.97.
Zooming out over the last 3 months and we see the mining giant's shares have crawled northwards with barely a hiccup along the way.
Its shares have rallied as high as 47.5% in that time to kiss 52-week highs of $13.35 just two weeks ago, before settling back down.
As seen on the chart below, IGO has broken away from the benchmark S&P/ASX 200 Index (ASX: XJO) and the divergence is becoming wider as time goes on.
As such the team at JP Morgan has been constructive on IGO for some time, particularly favouring the mining giant's exposure to lithium within its portfolio. It touts IGO as a "one-stop stock for [electric vehicle] EV raw material". Let's see what it had to say in a note from Monday.
IGO beats analyst estimates
Speaking on the company's most recent quarterly results released on January 31, analysts at JP Morgan noted that a robust quarter led to an outperformance at the net profit after tax (NPAT) level.
Specifically, NPAT came in at $52 million for Q2 FY22 – totalling $91 million for the first half – and a 1H FY22 net cash balance of $570 million. That was ahead of the broker's forecasts of $84 million and $558 million respectively.
Not only that, but guidance for the Greenbushes lithium mine is for higher production and lower cost in FY22 versus the broker's internal estimates.
Notably, resources at the mine have increased to 45 million tonnes (Mt) at 2.0% versus old resource levels of 38.5Mt at 2.1% in 2018.
Production guidance for IGO's lithium segment in FY22 is also forecast well ahead of JP Morgan's estimates. The company is expecting to produce 1,100–1,250kt versus the broker's 1,057kt figure.
Meanwhile, costs are expected to fall in the range of $300–$400 per tonne. That's 20-40% below what JP Morgan was baking into its models.
Nonetheless, the broker still forecasts $681 million in revenue for the company in FY22 and $652 million in FY23. This should carry through to earnings before interest, taxes, depreciation, and amortisation (EBITDA) of $492 million and $1.07 billion respectively in its model.
Hence, while it sees IGO's top-line growth begin to slow (and perhaps even decrease) over the next 2 years, it anticipates a massive run-up in operating income and free cash flow (FCF).
In fact, the broker forecasts $262 million of FCF in FY22, accelerating to $930 billion in FY23 – a 254% jump. That represents FCF yields of 3.3% and a mammoth 11.5% respectively.
Profits in the offing
JP Morgan reckons IGO is set to be incredibly profitable over the coming years. It is forecasting a return on equity (ROE) of 26–27% over the next 2 years.
It also forecasts the resource giant's dividend yields to track from less than 1% this year to almost 4% in FY23 and 6% the year after.
Plus at the current IGO share price, combined with JP Morgan's earnings estimates, the company is trading on a forward price to earnings (P/E) ratio of 9x in FY23, dropping to 8.2x in FY24. Currently, it trades at 58x P/E on last check.
The firm is heavily bullish and values IGO at $12.90 per share. Fellow brokers Jefferies, Credit Suisse, and Canaccord Genuity set price targets of $15.50, $15.30, and $13.00 on the stock in January.
IGO share price summary
In the last 12 months, the IGO share price has climbed around 85% and has outpaced all benchmark indices.
This year to date, the company's shares are up more than 4%.
