Lithium: Developer. PLS.asx Buy PILBARA MINERALS LTD (PLS) Stage 2 looks like it will happen. Big valuation uplift.

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1 Lithium: Developer Pilbara Minerals Ltd (PLS) PILBARA MINERALS LTD (PLS) Stage 2 looks like it will happen. Big valuation uplift. Pilbara Minerals Ltd (PLS) has announced a A$28m (56m 50cps) subscription from Great Wall Motors, mainly for the financing of the Stage 2 DFS to increase throughput to 5Mtpa targeting 800ktpa spodumene (combined with Stage 1 of 314ktpa) for 100ktpa LCE. The equity subscription will be completed after the binding off-take terms convert into a more comprehensive off-take agreement, which is expected by 30 October The Company also said that the previous General Lithium Subscription Agreement (A$17.75 million) has been cancelled due to regulatory constraints. Stage 2 offtake now ~65% of expected production Great Wall has signed a binding off-take agreement for 75ktpa of Stage 2 spodumene production with ability to secure a further 75ktpa on provision of Stage 2 debt funding (US$50m of debt or off-take pre-payment facility). This is in addition to the 150kt of offtake PLS has for Stage 2 with Gangfeng. Stage 2 offtake is now 300ktpa (versus Stage 2 production of ~475ktpa), which we believe is enough for the Company to commit to the expansion. Model changes We have now explicitly included Stage 2 (5Mtpa) in our estimates. We assume capex for the 3Mtpa expansion of A$175m (versus a total capital requirement for the initial 2Mtpa of ~$250m). The recent PFS estimated capex of A$128m for an additional 2Mtpa. Incorporating Stage 2 has a significant positive impact on our valuation (previously we included a risked component). We assume minimal change in unit costs due to a speculative assumption that recoveries could fall in a bigger operation and lower throughput grade. This is a conservative assumption and we note that Company studies show larger throughput will result in materially lower cash costs due to economy of scale. We estimate FY20 EBITDA at our base case of $370m. At spot prices, we estimate A$540m pa ($660m pa FY21). Upgrade to Buy (from Speculative Buy) We upgrade our recommendation to Buy. We have increased our twelve month price target to $1.06 (from 80cps), which implies ~8.0x FY19 EV/EBITDA (4.8x FY20) based on peak net debt of ~A$100m in May At the current share price, we estimate PLS trades on 4.9x FY19 EV/EBITDA (peak debt) and FY20 of 3.0x. At spot prices, the multiple is 3.8x and 2.1x respectively. The key risk is spodumene selling prices. Note, PLS is somewhat protected by its pricing mechanism which we believe provides support at ~US$300/t. At such prices, PLS could still generate a margin from the tantalum credits. At US$450/t, our valuation would be ~40cps. Our spot valuation (spodumene US$1000/t) is $1.66. We have no doubt that eventually lithium will be oversupplied, but whether that happens in 2018 or 2025 is not clear given the range of outcomes possible for demand. PLS will generate significant cash flow at current prices (when it is in production) and hence spodumene / lithium carbonate prices only need to stay strong for a relatively short period to generate significant free cash. The Great Wall investment shows industry is still more concerned about undersupply than oversupply. We upgrade to Buy. Share Price PLS.asx Buy Valuation $0.81 Price Target (12 month) $1.06 Brief Business Description: Very large spodumene development in WA Hartleys Brief Investment Conclusion Very large deposit that looks highly economic. Chairman & MD Tony Kiernan (Non-exec Chair.) Ken Brinsden (MD) Major Shareholders Mineral Resources (7.9%) Gangfeng (4.7%) Great Wall Motors (3.1%) Company Address Level 2, 88 Colin St, West Perth, WA, 6005 Issued Capital m - fully diluted Market Cap - fully diluted Cash (31 Jul 17e)* Debt (31 Jul 17e) EV EV/Resource Spod. EV/Reserve Spod. A$272.6m A$133.3m Prelim. (A$m) FY19e FY20e FY21e Prod (Li Spod. eq) Op Cash Flw Norm NPAT CF/Share (cps) EPS (cps) P/E Mt Li2O Spod. Resources (Li2O) % 32.6 Reserve (Li2O) % Trent Barnett Head of Research Ph: Oct 2017 $ m A$1024.2m A$1089.3m A$884.9m A$27.2/t A$52.1/t 0.40 A$ 15. M 0.30 Oct-16 Pilbara Min Ltd Feb-17 Jun-17. Sep-17 E: trent.barnett@hartleys.com.au Hartleys has assisted in the completion of part of a capital raising in the past 12 months for Pilbara Mines Limited Volume - RHS Source: IRESS PLS Shareprice - LHS Sector (S&P/ASX SMALL RESOURCES) - LHS 5. Hartleys Limited ABN (AFSL ) 141 Page St Georges 1 of 8 Terrace, Perth, Western Australia, 6000 Hartleys does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Further information concerning Hartleys regulatory disclosures can be found on Hartleys website

2 Pilbara Min Ltd Share Price 2 October 2017 PLS $0.635 Buy Key Market Information Directors Company Information Share Price $0.635 Tony Kiernan (Non-exec Chair.) Level 2, 88 Colin St, Market Capitalisation - ordinary A$1024m Ken Brinsden (MD) West Perth, WA, 6005 Net cash A$139m John Young (Exec., Technical) Ph Market Capitalisation - fully diluted A$1089m Steve Scudamore (Non-exec) Fax EV A$950m Nick Cernotta (Non-exec) Issued Capital m Brian Lynn (CFO) #REF! Options (inc General Lithium placements) Top Shareholders Ord Issued Capital (diluted for options) m Mineral Resources % Issued Capital (diluted inc. options and new capital) m Gangfeng % 12month price target $ Great Wall Motors 3.1% 3 Reserves & Resources Mt Li % Ta2O5 P&L Unit 30 Jun Jun Jun Jun Jun 21 4 Pilgangoora M+I % 130 Net Revenue A$m Pilgangoora Inf % 125 Total Costs A$m Pilgangoora Total % 128 EBITDA A$m margin - 51% 62% 59% 50% 8 Pilgangoora Reserve % 123 Depreciation/Amort A$m EBIT A$m Global Total % 128 Net Interest A$m Global Reserve % 123 Pre-Tax Profit A$m Production Summary Unit Jun 17 Jun 18 Jun 19 Jun 20 Jun 21 Tax Expense A$m Normalised NPAT A$m Processed Mill Throughput Mt Abnormal Items A$m Mined grade Li % 1.3% 1.3% 1.3% Reported Profit A$m Produced Spodumene - Technical Mt Minority A$m Produced Spodumene - Battery Mt Profit Attrib A$m Produced Tantalite Mlb pa Produced Spodumene - Battery Eq Mt Balance Sheet Unit 30 Jun Jun Jun Jun Jun 21 LCE equiv (0.135x Spod) ktpa Cash A$m Mine Life yr Other Current Assets A$m Assumed Mining Inventory Mt Total Current Assets A$m Assumed Mining Inventory - Li grade % 1.27% 1.27% 1.26% 1.26% Property, Plant & Equip. A$m Assumed Mining Inventory - Tant grade ppm Exploration A$m Capex Investments/other A$m Costs Unit Jun 17 Jun 18 Jun 19 Jun 20 Jun 21 Tot Non-Curr. Assets A$m Cost per milled tonne $A/t Total Assets A$m EBITDA / tonne milled ore $A/t Total cost per milled tonne Short Term Borrowings A$m Total Cash Costs $A/t Spod. Batt. eq Other A$m $US/t Spod. Batt. eq Total Curr. Liabilities A$m C1: Operating Cash Cost = (a) $A/t Spod. Batt. eq Long Term Borrowings A$m (a) + Royalty = (b) $A/t Spod. Batt. eq Other A$m C2: (a) + depreciation & amortisation = (c) $A/t Spod. Batt. eq Total Non-Curr. Liabil. A$m (a) + actual cash for development = (d) $A/t Spod. Batt. eq 5, Total Liabilities A$m AISC: (c) + Royalty $A/t Spod. Batt. eq Net Assets A$m (d) + Royalty $A/t Spod. Batt. eq 5, Net Debt A$m Price Assumptions Unit Jun 17 Jun 18 Jun 19 Jun 20 Jun 21 AUDUSD US$/A$ Cashflow Unit 30 Jun Jun Jun Jun Jun 21 Spodumene - Chemical (ie Battery) US$/t Operating Cashflow A$m Tantalite US$/t Income Tax Paid A$m Hedging Unit Jun 17 Jun 18 Jun 19 Jun 20 Jun 21 Interest & Other A$m none Operating Activities A$m Sensitivity Analysis Property, Plant & Equip. A$m Base Case Valuation FY21 NPAT Exploration and Devel. A$m Spot Prices 1.66 (105.4%) (131.9%) Other A$m Spot USD/AUD 0.78, Chemical Spod $1000/t,Tant. $60/lb. Investment Activities A$m AUDUSD +/--10% 0.66 / 0.98 (-17.9% / 21.9%) / (-20.2% / 24.6%) Spodumene - Technical +/--10% 0.81 / 0.81 (0.0% / 0.0%) / (0.0% / 0.0%) Borrowings A$m Spodumene - Chemical +/--10% 0.96 / 0.66 (18.4% / -18.4%) / (20.7% / -20.7%) Equity or "tbc capital" A$m Tantalite +/--10% 0.82 / 0.80 (1.2% / -1.2%) / (1.5% / -1.5%) Dividends Paid A$m Production +/--10% 0.96 / 0.66 (18.4% / -18.4%) / (20.7% / -20.7%) Financing Activities A$m Operating Costs +/--10% 0.73 / 0.88 (-9.1% / 9.1%) / (-9.7% / 9.7%) Unpaid Capital Net Cashflow A$m Year Expires No. (m) $m Avg price % ord 30-Jun % Shares Unit 30 Jun Jun Jun Jun Jun Jun % Ordinary Shares - End m Jun % Ordinary Shares - W'ted m Jun % Diluted Shares - W'ted m Jun % TOTAL % Ratio Analysis Unit 30 Jun Jun Jun Jun Jun 21 Valuation $m $/shr Cashflow Per Share A$ cps % Pilgangoora (pre-tax NAV at disc. rate of 12%) Cashflow Multiple x Other Assets/Exploration Earnings Per Share A$ cps Forwards Price to Earnings Ratio x Corporate Overheads Dividends Per Share AUD Net Cash (Debt) Dividend Yield % 0.0% 0.0% 0.0% 0.0% 0.0% Net Debt / Net Debt + Equity% -240% 15% 1% -43% -102% Tax (NPV future liability) Interest Cover X Options & Other Equity Return on Equity % na 2% 40% 37% 23% Total Analyst: Trent Barnett "tbc capital" could be equity or debt. Our valuation is risk-adjusted for how this may be obtained. Sources: IRESS, Company Information, Hartleys Research 2 Oct 17 Page 2 of 8

3 Fig. 1: Hartleys Earnings Changes FY18e FY19e FY20e FY21e Old New % diff Old New % diff Old New % diff Old New % diff Production % % % % Selling Price % % % % Net Revenue % % % % Total Costs % % % % - /t USD % % % % - /t ore USD % % % - /t ore USD DFS EBITDA % % % % - margin 53% 51% -4.0% 62% 62% -0.2% 60% 59% -2.0% 51% 50% -1.5% Depreciation/Amort % % % % EBIT % % % % Net Interest % % % % Pre-Tax Profit % % % % Tax Expense Normalised NPAT % % % % Abnormal Items Reported Profit % % % % Minority Profit Attrib % % % % Capex % % % % Net Debt % % % % Source: Hartleys Research Fig. 2: China Lithium Carbonate Prices US$k/t 30 Lithium Carbonate 99.5% Source: Various 0 Jun 11 Dec 11 Jun 12 Dec 12 Jun 13 Dec 13 Jun 14 Dec 14 Jun 15 Dec 15 Jun 16 Dec 16 Jun 17 Page 3 of 8

4 Fig. 3: There is a long list of lithium developers, but financing, metallurgy and development are uncertain for many. De-risked developers (like PLS) are in strong position Source: Hartleys Estimates, Various Page 4 of 8

5 Fig. 4: Key Assumptions and Risks for valuation Assumption Risk of not realising assumption Downside risk to valuation if assumption is incorrect Comment ~25 year mine life Low Moderate This appears reasonable conservative based on current resources / reserves and assuming production of 5Mtpa (mine life longer if Stage 2 is no incorporated) Spodumene selling prices Moderate Upside / Downside We assume strong near term spodumene prices, falling to US$600/t long term 5mtpa processing Moderate Moderate We assume Stage 2 expansion. No more equity financing Low Meaningful We assume no more dilution in our valuation. Tantalite recoveries far lower than DFS No value for downstream opportunities Low Upside We assume low recoveries in order to be conservative Low Upside We assume no explicit value for potential downstream opportunities. Exploration value Moderate Low We assume modest exploration value. Conclusion Source: Hartleys Spodumene selling prices are the most significant risk. Commissioning and financing are also risks to our valuation. Page 5 of 8

6 PRICE TARGET We have reduced our target to $1.06 (from $0.80). Price Target Methodology Weighting Spot 12 mth out NPV base case 60% $0.81 $0.81 NPV at spot commodity and fx prices 30% $1.66 $1.76 NPV spodumene US$450/t 10% $0.37 $0.41 Net cash 10% $0.17 $0.00 Risk weighted composite $ Months Price Target $1.06 Shareprice - Last $ mth total return (% to 12mth target + dividend) 66% Source: Hartleys Estimate Page 6 of 8

7 EV/EBITDA BANDS Fig. 5: Using Hartleys base case commodity forecasts Shareprice PLS Actual Hartleys Target 8x EV/EBITDA 6x EV/EBITDA 4x EV/EBITDA 2x EV/EBITDA 1x EV/EBITDA Source: Hartleys Estimates, IRESS Fig. 6: Using spot commodity prices Shareprice PLS Actual 8x EV/EBITDA 6x EV/EBITDA 4x EV/EBITDA 2x EV/EBITDA 1x EV/EBITDA Source: Hartleys Estimates Page 7 of 8

8 HARTLEYS CORPORATE DIRECTORY Research Trent Barnett Head of Research Mike Millikan Resources Analyst John Macdonald Resources Analyst Paul Howard Resources Analyst Aiden Bradley Research Analyst Michael Scantlebury Junior Analyst Janine Bell Research Assistant Corporate Finance Dale Bryan Director & Head of Corp Fin. Richard Simpson Director Ben Crossing Director Ben Wale Associate Director Stephen Kite Associate Director Scott Weir Associate Director Scott Stephens Associate Director Rhys Simpson Manager Registered Office Level 6, 141 St Georges TcePostal Address: PerthWA 6000 GPO Box 2777 Australia Perth WA 6001 PH: FX: info@hartleys.com.au Note: personal addresses of company employees are structured in the following manner:firstname.lastname@hartleys.com.au Hartleys Recommendation Categories Buy Accumulate Neutral Reduce / Take profits Sell No Rating Speculative Buy Share price appreciation anticipated. Share price appreciation anticipated but the risk/reward is not as attractive as a Buy. Alternatively, for the share price to rise it may be contingent on the outcome of an uncertain or distant event. Analyst will often indicate a price level at which it may become a Buy. Take no action. Upside & downside risk/reward is evenly balanced. It is anticipated to be unlikely that there will be gains over the investment time horizon but there is a possibility of some price weakness over that period. Significant price depreciation anticipated. No recommendation. Share price could be volatile. While it is anticipated that, on a risk/reward basis, an investment is attractive, there is at least one identifiable risk that has a meaningful possibility of occurring, which, if it did occur, could lead to significant share price reduction. Consequently, the investment is considered high risk. Institutional Sales Carrick Ryan Justin Stewart Simon van den Berg Chris Chong Digby Gilmour Tia Hall Wealth Management Nicola Bond Bradley Booth Adrian Brant Nathan Bray Sven Burrell Simon Casey Tony Chien Tim Cottee David Cross Nicholas Draper John Featherby Ben Fleay James Gatti John Goodlad Andrew Gribble David Hainsworth Murray Jacob Gavin Lehmann Shane Lehmann Steven Loxley Andrew Macnaughtan Scott Metcalf David Michael Jamie Moullin Chris Munro Michael Munro Ian Parker Matthew Parker Charlie Ransom (CEO) Mark Sandford David Smyth Greg Soudure Sonya Soudure Dirk Vanderstruyf Samuel Williams Jayme Walsh Disclaimer/Disclosure The author of this publication, Hartleys Limited ABN ( Hartleys ), its Directors and their Associates from time to time may hold shares in the security/securities mentioned in this Research document and therefore may benefit from any increase in the price of those securities. Hartleys and its Advisers may earn brokerage, fees, commissions, other benefits or advantages as a result of a transaction arising from any advice mentioned in publications to clients. Hartleys has completed a capital raising in the past 12 months for Pilbara Minerals Limited ("Pilbara") for which it has earned fees. Hartleys is acting as Underwriter to Pilbara's Share Purchase Plan for which it expects to earn fees. Any financial product advice contained in this document is unsolicited general information only. Do not act on this advice without first consulting your investment adviser to determine whether the advice is appropriate for your investment objectives, financial situation and particular needs. Hartleys believes that any information or advice (including any financial product advice) contained in this document is accurate when issued. Hartleys however, does not warrant its accuracy or reliability. Hartleys, its officers, agents and employees exclude all liability whatsoever, in negligence or otherwise, for any loss or damage relating to this document to the full extent permitted by law. Page 8 of 8