ASX lithium shares, and commodity businesses in general, can go through more volatility than other sectors because of how quickly resource prices change and what that can do to profitability and investor confidence.
On The Bull, Jed Richards from Shaw and Partners recently labelled Pilbara Minerals shares a buy for the following reasons:
Richards pointed to growing lithium demand as a positive for the business.
Lithium is one of the major resources needed in the production of electric vehicles. Although lithium batteries aren't just used in cars. They're also used for home batteries (which usually connect to solar panels) and large-scale batteries used to support the electricity grid.
According to the International Energy Agency (IEA), in a scenario that meets the Paris Agreement goals, lithium is the commodity that will see its demand increase by more than 40 times its current level by 2040.
Lithium can be found in multiple countries around the world, and miners may be able to sell one tonne of lithium for the same price whether it's from Australia, Chile, or somewhere else. But some countries can come with higher operational risks.
Australia offers miners strong infrastructure (such as roads, rails, and ports), a comparatively stable political system, typically strong control of its currency and inflation, and the country usually has fairly accommodating and consistent laws for miners.
Production and sales
The broker is also attracted to Pilbara Minerals shares because of the strong progress with production and sales that the ASX lithium share is making, which is helping grow its underlying margins and scale.
In FY23, the company reported that its production grew by 64% to 620.1kt and sales went up by 68% to 607.5kt.
The ASX lithium share has a plan to grow its (nameplate annual) production to 1mt from the Pilgangoora operations, with first ore targeted for the FY25 third quarter. This growth could help the Pilbara Minerals share price, particularly if the lithium price holds up (or rises).
Pilbara Minerals is now generating so much cash that the board of directors feel confident enough for the company to start paying dividends.
According to Commsec, the business could pay an annual dividend per share of 23.1 cents.
Healthy cash position
In the latest quarterly update for the three months to June 2023, it said that its cash balance had increased to $3.3 billion, which was a 24% increase. This is enabling the business to invest and pay dividends.
The business is planning to release its FY23 result this Friday, 25 August 2023, so investors will be able to get a good look at the company's financials.