Why the Pilbara Minerals share price is up 50% since December

The share price of Pilbara Minerals Limited (ASX:PLS) is up 50% since December. But is an investment in this pureplay lithium miner worth the volatility?

Last week was a topsy-turvy week for shareholders of lithium miner Pilbara Minerals Ltd (ASX: PLS). The miner's share price started the week strongly, up 3% on Monday before skyrocketing over 11% higher on Tuesday. It erased much of those gains on Wednesday after it slid 8% lower as short-term traders took some of their Tuesday profits off the table. However, on Friday Pilbara shares were the best-performing stock on the S&P/ASX 200 (INDEXASX: XJO), surging back up almost 9% to $0.38.

And while all this volatility in the share price makes Pilbara's long-term investors feel understandably queasy, they still would have gone into the weekend happy with the company's share price up just under 12% overall for the week. This extends a period of strong recovery for Pilbara Minerals – its shares have now rallied more than 50% since dropping to a 52-week low of $0.25 back in mid-December.

Fellow lithium miners Galaxy Resources Limited (ASX: GXY) and Orocobre Limited (ASX: ORE) had similarly volatile weeks, with their share prices both surging over 7% higher on Tuesday before correcting over the second half of the week. However, like Pilbara, both still finished the week well up over their previous Friday's close.

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What is driving the volatility?

With no news released by any of these companies over the past week, investor activity is most likely being driven by developments overseas in China. Earlier this week, China's Minister of Industry and Information Technology, Miao Wei, announced that the government would not be significantly scaling back subsidies for new electric vehicles this year. Since 2009, the Chinese government has had policies in place to subsidise the electric vehicle industry in order to stimulate growth, however it has been incrementally reducing its funding over recent years.

The government's decision to keep these subsidies stable, rather than reduce them further, has buoyed investor sentiment for the electric vehicle industry. In the US, the Tesla Inc share price surged to a new record high on the back of the news, crossing the psychological $500 mark for the first time in its history.

Lithium is one of the key components in the batteries that power electric vehicles, so the increasingly bullish outlook for the industry is benefitting local pure play lithium producers like Pilbara, Galaxy and Orocobre. The share price performances of these companies had been disappointing in 2019, with all 3 sliding to new multi-year lows. In November, Pilbara Minerals even announced that it planned to "moderate" production at its flagship Pilgangoora Lithium-Tantalum Project in response to softening market conditions.

The hope will now be that this latest decision by the Chinese government will be enough to reinvigorate the market and once again drive up demand for lithium.

Should you invest?

The market for lithium has proven itself to be fickle over the last few years. With many junior players already operating in the space, as well as big established miners like Rio Tinto Limited (ASX: RIO) considering entering the market, there is the constant threat that oversupply will dampen commodity prices.

That being said, Pilbara is still well positioned to capitalise on improving investor sentiment. The Pilgangoora Lithium-Tantalum Project is one of the largest lithium deposits in the world, and Pilbara already has offtake agreements in place with Chinese companies Ganfeng Lithium and Great Wall Motor Company, as well as South Korean steel producer POSCO.

These improving market conditions could see 2020 become the year in which Australian lithium miners turn their fortunes around. However, if last week is anything to go by, there will still be plenty of bumps along the way. So if volatility isn't your thing, then perhaps this is still a space best avoided.

Motley Fool contributor Rhys Brock owns shares of Galaxy Resources Limited and Pilbara Minerals Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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