The Pilbara Minerals Ltd (ASX: PLS) share price has dropped around 30% since 25 January 2023. Is this the perfect time to buy into the ASX lithium share?
This has been a tough period for the company, it has underperformed the S&P/ASX 200 Index (ASX: XJO) – the ASX 200 only dropped by 2% over that same time period.
What has gone wrong for the Pilbara Minerals share price?
The company's fortunes are heavily linked to the lithium price. A commodity producer is able to produce a certain amount of its resource. That production has a cost that doesn't change much from month to month.
If the commodity price increases, the company is getting more revenue while costs stay the same – higher prices largely add straight onto net profit for a miner.
But, it's the opposite when resource prices fall. It mostly wipes off the profit.
Sadly, for Pilbara Minerals, the lithium price has dropped quite heavily over the last few months.
It's not just the lithium price that has been going downward. Tesla recently cut prices for its cars and has been regularly doing so to try to "drive demand" according to The Guardian reporting on Elon Musk's comments.
However, these price changes by Tesla have reportedly "stoked demand". Perhaps this will increase the demand for lithium.
Is this a good time to buy?
I think that the best time to buy ASX mining shares is when there's pessimism and the commodity price has fallen. This certainly describes the situation for the Pilbara Minerals share price. It's not as low as it could be, but we don't know how low things are going to go.
Pilbara Minerals is growing its production and the lithium price is still at a good price for the company to generate good cash flow. It has a huge cash pile – its cash balance was $2.23 billion at 31 December 2022. If we removed the cash from the valuation, I think the valuation would look very reasonable.
I think the long-term outlook for electric vehicle demand is very good, which should help support the lithium price. I like Pilbara Minerals' plan to become more involved in the lithium value chain, which can help increase its profit margins.
The current projection on Commsec is that the business could generate 53.3 cents per share of earnings per share (EPS), putting the Pilbara Minerals share price at under 7 times FY24's estimated earnings. That projection implies a 35% fall in profit compared to the forecast EPS for FY23. It could also pay a grossed-up dividend yield of 6.5% in FY24.
I think it's a fairly good time to buy shares for the longer term.
