The Pilbara Minerals Ltd (ASX: PLS) share price has drifted below $4. Since 25 January 2023, it has dropped by around 30%.
That's a hefty decline for an ASX lithium share that has a market capitalisation of more than $10 billion, according to the ASX.
It has been very beneficial to be an owner of Pilbara Minerals shares over the long term, with the company's share price rising by around 375% in the past five years. The S&P/ASX 200 Index (ASX: XJO) has only gone up by 20% over the past five years.
However, I'd say there are two key reasons why the Pilbara Minerals share price has done so well over the last few years. One is that the company has ramped up production at its Pilgangoora project and is benefiting from a significantly higher lithium price.
But, after recent volatility, can the business turn things around and make more returns for investors?
Can the Pilbara Minerals share price keep rising?
I think the shorter-term outlook for the business will be decided by the lithium price. The lithium price has reportedly sunk over the last few months. This could have a sizeable impact on the month-to-month profitability of the business, though it's still making a good level of profit.
In the first half of FY23, Pilbara Minerals said that its average realised sales price was US$4,993 per dry metric tonne (dmt), which was 305% higher than for the prior corresponding period. This helped statutory net profit after tax (NPAT) increase by 989% to $1.24 billion while the cash on its balance sheet increased by $1.63 billion since June 2022 to $2.23 billion.
I'm not sure if the lithium price is going to recover, or even just stabilise, at this level. But it does seem as though demand is going to keep rising.
Rio Tinto Limited (ASX: RIO) notes that lithium is a vital component for technologies like electric vehicles and batteries. According to Rio Tinto, double-digit growth in lithium demand is expected over the next decade.
According to a KPMG report about the mining outlook, it said regarding lithium:
We estimate lithium production would need to grow by around 12 percent per year every year until 2050 to produce enough of that mineral to have two billion EVs on the roads. Given that, lithium production is expected to grow at nearly double that pace in the near term.
So while the demand for lithium is expected to increase, the supply is expected to increase in that time too. We'll just have to see what the balance of supply and demand looks like in future years.
For me, I'm not expecting the lithium price to reach a new all-time high any time soon. But I do like that the company is looking to increase its exposure to more of the lithium value chain, as well as increase its production.
According to Commsec, earnings are expected to fall in FY24 and then in FY25. This would put the current Pilbara Minerals share price at 7x FY25's estimated earnings. I think there is a bit of leeway for the ASX lithium share to rise in the double-digits and still be at a fair valuation.
However, I think Pilbara Minerals has seen a lot of share price growth. There are other, smaller businesses which could grow more and, therefore, be more likely to produce good returns.
