Down 24% in a month, is the Pilbara Minerals share price now a bargain buy?

Could this be a lithium lover's delight or are Pilbara shares fraught with danger?

Mitchell Lawler

Mitchell stumbled upon the concept of investing when in high school, devotedly urging his parents to put some money into a handful of technology companies with increasingly popular products among his demographic – many of which have gone on to great success. It wouldn’t be until 2017, some five years later, that Mitchell became an investor of his own money. Having studied and worked as a mechanical engineer in the building services industry, Mitchell takes a methodical and analytical approach to evaluating businesses. Rather than relying purely on numbers, Mitchell drills beyond a company’s metaphorical mantle to unearth obscure patterns or competitive advantages that would go otherwise unnoticed. His expertise resides within areas such as software, consumer goods, and building services equipment. However, his quest to find quality companies that set the industry standard and flex some degree of an impenetrable position has no limits – small cap to mega cap, cosmetics to healthcare – if it’s an exceptional business it’s on his radar.

Published March 14, 2023 2:41 pm AEDT

The Pilbara Minerals Ltd (ASX: PLS) share price is digging a deeper hole on Tuesday.

At the time of writing, shares in the lithium producer are down 6.2% to $3.65. The company is not alone in its punishment today, with nearly the entire S&P/ASX 200 Index (ASX: XJO) sitting in the red, aside from some strength among gold miners.

It's been a tough month for Pilbara Minerals shares amid a cascading lithium price. A mixed bag of views on the battery commodity has cast doubt on the industry's future cash flows. In turn, the Pilbara Minerals share price has tumbled 24% over the past month.

Could the downtrodden price represent a valuable opportunity?

Female miner smiling in front of a mining vehicle as the Pilbara Minerals share price rises — Image source: Getty Images

Time to pull the trigger on Pilbara Mineral shares?

First and foremost, mining is a price-taking industry. Profits for companies — including those of Pilbara Minerals — are heavily dependent on the going rate for the commodity in question.

All else equal, you can expect the company's earnings to grow in lockstep with the material. Hence, the supply and demand of lithium are critical to the performance of the industry and the companies that operate in it.

As we can see in the chart below, Pilbara's profits have skyrocketed alongside the price of lithium since 2021. However, lithium futures (orange) have traded downwards since the end of last year, coinciding with the peak in revenue.

While Pilbara Minerals shares may look cheap at a price-to-earnings (P/E) ratio of 6.6 right now, this is based on the past 12 months of earnings. The concern is earnings could be meaningfully lower moving forward with lithium carbonate prices tumbling nearly 40% so far this year.

If the current Pilbara Minerals share price represents an opportunity then it really comes down to whether you believe lithium prices will trend higher or sustain their downward move.

What are analysts forecasting for lithium?

As previously mentioned, the future of lithium depends on who you ask and over what time frame.

My colleague, Tristan Harrison, recently wrote about Citi's forecasts of further weakening in the electrifying material's price.

According to the broker, short-term pressure will come from a perceived weakness in electric vehicle demand in China. As such, Citi's analysts are expecting a price of US$40,000 per tonne in the next three months compared to its prior US$60,000 per tonne estimate.

Meanwhile, the team at Morgans is expecting demand in the Chinese market to return from March onwards. On this assumption, analysts think Pilbara Minerals shares are worth considering amid the selling.

Automatic Renewal

By taking up this offer, you will also be enrolled in our auto-renewal program, which is our way of making your ongoing subscription easier by ensuring uninterrupted service. Don't worry, though – you're not locked in, and can cancel your auto-renewal at any time before each 'anniversary' date without question or penalty.