Why these are my top 2 ASX lithium share picks

I'd choose these two companies to charge up my returns.

| More on:
A smiling woman holds an arm in the air in triumph while also holding a graphic of a fully-charged battery in her other hand representing the Pilbara Minerals share price

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

There are a number of compelling businesses within the ASX lithium share sector that could be good investments.

Each lithium miner has its positives and negatives, and they're at various stages of progress. Some are only just developing the lithium discovery they've found, whereas others have been producing lithium for a while.

The lithium price has dropped from its highest level roughly a year ago, but it's still (very) high compared to prior levels. As well, there is projected to be significant long-term demand for lithium with the expected growth of electric vehicles and other battery uses. Certainly, I have that in mind with both of the following picks.

Pilbara Minerals Ltd (ASX: PLS)

This ASX lithium share is one of the miners that is currently producing a lot of the commodity and capitalising on the appealing lithium price. Pilbara Minerals reported in the fourth quarter of FY23, it achieved a realised price of US$3,256 per tonne, down 33% year over year. But the average realised price in FY22 was US$2,382, so the company is seeing good operating conditions.

We don't know what the lithium price is going to do next but Pilbara Minerals is in a position to be making huge cash flow. At this stage, there are plenty of other lithium companies that aren't so they're missing out.

In FY23, revenue jumped 242% to $4 billion, net profit after tax (NPAT) soared 326% to $2.39 billion, and operating cash flow jumped 440% to $3.66 billion.

A lot of the company's valuation is backed up by a huge cash pile. Its cash balance went from US$592 million to $3.3 billion over the 2023 financial year. This can be used for paying dividends and to fund its growth projects.

I'm excited by the ASX lithium share's plans to grow its production to around one million tonnes per annum (up from 607kt in FY23) and also take a larger position in the lithium value chain (rather than just producing raw lithium), such as the POSCO joint venture hydroxide plant.

Pilbara Minerals is expected to generate earnings per share (EPS) of 50.3 cents in FY24, according to Commsec, which puts the ASX lithium share at nine times FY24's estimated earnings.

Mineral Resources Ltd (ASX: MIN)

My other pick is Mineral Resources, a business that mines both lithium and iron ore. It's also an important mining services provider.

One of the main reasons I like this ASX lithium share is because it's working hard to expand its operations in both iron and lithium, meaning it can increase its underlying value and grow profit and cash flow.

The company's EPS is projected to jump to $5.81 as its increasing production comes online. This would put the Mineral Resources share price at 12 times FY25's estimated earnings, with good earnings growth possible in the subsequent years.

There's also an added bonus of its 'energy' segment, which includes the North Erregulla-1 gas discovery, the Norwest Energy acquisition, and the Wonmunna solar array. To me, this side of the business is nice to have and has value, but isn't core.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Opinions

A little girl holds on to her piggy bank, giving it a really big hug.

2 top ASX dividend stocks to buy and hold forever

Here are two companies I'd buy shares in to keep the income up instead of holding cash.

Read more »

Two men excited to win online bet

2 top industrial stocks to buy on the ASX today

I think these two ASX industrials shares are looking pretty good.

Read more »

Modern accountant woman in a light business suit in modern green office with documents and laptop.

Why I think this is the safest stock in my ASX share portfolio

This is a very resilient business in my opinion.

Read more »

Smiling woman holding Australian dollar notes in each hand, symbolising dividends.

2 ASX dividend stocks I'll be buying hand over fist in 2024

These two shares are on the top of my 2024 wish list.

Read more »

a man sits on a ridge high above a large city full of high rise buildings as though he is thinking, contemplating the vista below.
How to invest

Why I just sold my biggest ASX stock holding

It's not always about money and the best returns. You need to be able to live with your investment decisions.

Read more »

three children wearing superhero costumes, complete with masks, pose with hands on hips wearing capes and sneakers on a running track.
Investing Strategies

The 3 best deals on the ASX today

Grab these stocks while they're cheap before interest rates stop rising.

Read more »

a woman wearing the black and yellow corporate colours of a leading bank gazes out the window in thought as she holds a tablet in her hands.

2 ASX shares I'd buy over CBA stock in December 2023

Here's why I'd pick these top shares over CBA right now.

Read more »

A woman sits at her computer with her hand to her mouth and a contemplative smile on her face as she reads about the performance of Allkem shares on her computer

These 2 ASX 200 shares just hit 52-week lows: I rate them as buys

These two stocks look too cheap to miss!

Read more »