The Pilbara Minerals Ltd (ASX: PLS) share price is back on form on Thursday.
In afternoon trade, the lithium miner's shares are up 4.5% to $4.45.
Why is the Pilbara Minerals share price rising?
Today's gain by the Pilbara Minerals share price comes despite there being no news out of the company.
However, with its shares down meaningfully this month, some investors appear to have been buying them on the belief that they have been oversold.
One leading broker that would support this buying is Canaccord Genuity. Earlier this week, the broker reiterated its buy rating with a $5.00 price target.
Even after today's gain, this price target implies potential upside of 12% for investors over the next 12 months.
What did the broker say?
Canaccord Genuity notes that the company has announced a new sales arrangement for a 15,000 tonne cargo of spodumene concentrate.
This agreement has been structured to be based on a tolling arrangement under which Pilbara Minerals will receive the value of the lithium hydroxide price for the product sold, less an agreed amount for conversion and other costs.
Canaccord Genuity believes this is a great move by management and expects it to result in a price comfortably ahead of its estimates.
This bodes well for its near term earnings and may mean recent panic selling has been an overreaction. It commented:
With spot LiOH [lithium hydroxide] pricing of ~US$65,000/t this implies a tolling and cost "charge" of US$6,000/t to achieve ~US$8.200/t. If we were to use the Wuxi carbonate futures as an indication to April 2023 pricing (US$45,803/t) this would result in an approximate realised price of US$5,528/t at time of conversion. This calculation doesn't factor for the ~US$7,000/t premium for lithium hydroxide over carbonate (potentially an incremental ~US$1.000/t on pricing). Either way. the estimated read-through is well north of our US$4,500/t MarQ'23 assumption and US$3,500/t JunQ'23 assumption.
The broker concludes:
Based on the current stock price, our model indicates the equity market is pricing PLS at US$1,575/t SC6 flat into the future. Near-term earnings would be impacted (at US$1,575/t); however, we would still see value given our US$1,500/t LT assumption. Conversely, if spot prices were to hold until the end of FY23, its cash balance could grow to AS3.5bn (from As2.2bn at the end of DecO'22) and we estimate there could be ~22% upside to FY23 EBITDA (+149% if held through FY24).
