Of all the ASX lithium shares on the All Ordinaries Index (ASX: XAO) and indeed the S&P/ASX 200 Index (ASX: XJO), Pilbara Minerals Ltd (ASX: PLS) shares are certainly the most famous and well-known.
Pilbara Minerals is today the largest pure-play lithium share on the stock market. It currently has a market capitalisation of just over $15 billion, and (rarely amongst lithium shares) has also just started paying out dividends.
Despite its 6% slide in value on Monday, the Pilbara share price remains up by an impressive 37.85% year to date, as well as by more than 54% over the past 12 months:
I'm not interested in investing in Pilbara shares today though. I think it is a fine company. But I also think that investing in any pure-play mining company is risky. Especially one that has run up more than 50% over the past 12 months.
Pilbara's fortunes are entirely dependent on the price of lithium itself. If this future-facing battery ingredient goes into a years-long bear market, then you can be sure that Pilbara shares will suffer enormously.
That's why I prefer Wesfarmers Ltd (ASX: WES) as an ASX lithium share for my portfolio today.
Why I would pick Wesfarmers as an ASX lithium share over Pilbara
Wesfarmers might seem like an odd choice here. After all, this venerable blue chip ASX share is more well-known for its stewardship of some of Australia's best-known retail brands. Those include Bunnings, Kmart, Target and OfficeWorks.
But what some investors might not be aware of is Wesfarmers' significant lithium assets. In 2019, the company acquired lithium play Kidman Resources, and with it, a 50% stake in the Mt Holland lithium project in Western Australia. The other 50% is owned by the Chilean company Sociedad Quimica y Minera de Chile S.A. Together, this joint venture is known by the name Covalent Lithium.
The Mt Holland lithium project is still under construction. Wesfarmers is only expecting its first earnings from the project to arrive in 2024.
But that's exactly why Wesfarmers shares might be worth taking a look at today for their lithium exposure.
That's certainly the view of TMS Capital fund manager Ben Clark. Clark was recently interviewed in the Australian Financial Review (AFR). Here's some of what he said about Wesfarmers:
What might not be so well known is that [Wesfarmers], through its 50 per cent ownership of Mt Holland, will soon be mining lithium from what will be the fifth-largest mine in the world… Based on analyst updates we consider the profit contribution to Wesfarmers will be highly meaningful.
Forecasting what a mine will earn is notoriously difficult, we're yet to get real clarity on what production rates or production costs will look like – never mind predicting the lithium price. However, using fairly conservative assumptions, this mine could be generating over $1 billion in earnings before interest and taxes annually to Wesfarmers. I don't think the market has started pricing it in as yet.
As such, this is one of the reasons why I'm far more excited about the prospects of investing in Wesfarmers shares today for lithium exposure to those of Pilbara Minerals.
If lithium markets do tank, Wesfarmers will still have its plethora of other businesses to fall back on. As such, there is a significant potential upside here with the company's lithium exposure, with relatively far less downside.
