There are plenty of options for investors to choose from in the lithium industry on the ASX.
Two popular options right now are Liontown Resources Ltd (ASX: LTR) and Pilbara Minerals Ltd (ASX: PLS).
And while it could be tempting to add both to your portfolio, for diversification reasons it would probably be best to limit your exposure to just one.
But which one is the best ASX lithium share to buy now? Here are my thoughts:
Is Liontown the ASX lithium share to buy?
Liontown is the owner of the Kathleen Valley lithium project in Western Australia. It is targeting spodumene production of around 511,000 tonnes+ per annum (tpa) from 2024, before eventually expanding to 658,000 tpa in the future.
This spodumene is already in demand with end users before it has been pulled from the ground. The company has signed binding offtake agreements with Ford, LG Energy Solution, and Tesla.
As you might have seen, Liontown shares have been on fire this week after lithium giant Albemarle tabled a non-binding $2.50 per share takeover offer, which was swiftly rejected by management.
But despite this incredible rise, I do see scope for the Liontown share price to keep rising. In fact, Bell Potter suggested that its shares could be worth as much as $3.35. This is approximately 28% higher than where they trade today.
However, it is worth remembering that the company is still developing the Kathleen Valley lithium project in a highly inflationary environment. This means there are risks that its costs could continue to rise beyond currently planned capex spending.
In addition, the company does not have the required cash to complete construction and will have to raise funds in the near future. Given its recent share price rise, a capital raising may now be more attractive than debt funding. If this were to happen, it could put downward pressure on Liontown's shares.
Overall, I think Liontown is an attractive option for investors looking for lithium exposure, but perhaps not the best way to do it.
Is Pilbara Minerals a better option?
Of these two ASX lithium shares, I suspect that Pilbara Minerals could be the better buy.
It is a lithium mining and exploration company and one of only a small number of major hard-rock lithium producers globally. It operates the 100% owned Pilgangoora Project, which is located just 120km from Port Hedland. It comprises two processing plants with a combined nameplate capacity of 580,000 tpa of spodumene concentrate.
However, just yesterday, the company announced board approval to increase its spodumene concentrate capacity to 1 million tpa in the coming years.
The good thing about this production growth is that it should help limit the impact that potentially weaker lithium prices could have on its earnings in the future.
And with Pilbara Minerals announcing its capital management framework late last year, this may bode well for future dividend payments.
In fact, a note out of Citi from this morning reveals that its analysts expect this lithium share to pay fully franked dividends of 24 cents per share in FY 2023, 17 cents per share in FY 2024, and 20 cents per share in FY 2025. This would mean yields of approximately 6%, 4.2%, and 5%, respectively.
And with a buy rating and price target of $4.60, Citi also sees a potential upside of 14% over the next 12 months.
The verdict
Overall, while the potential returns may be lower than what's on offer with Liontown shares, I believe the risk/reward is more compelling with Pilbara Minerals shares. As a result, I think it is the better ASX lithium share to buy now.
