The Pilbara Minerals Ltd (ASX: PLS) share price has dropped around 15% over the past month. It's now down 26% since 10 August 2023.
That's quite painful considering the S&P/ASX 200 Index (ASX: XJO) is down 5.8% in the past month and since 10 August 2023 it's down 6.4%.
The ASX lithium share has seen plenty of volatility over the last year, with the business hitting various highs and lows – it has reached $5.50 and also dropped below $3.50. Right now it's sitting around $4.
After such a painful decline in just a couple of months, I'm going to look at whether the Pilbara Minerals share price is attractive.
A volatile opportunity?
It's tricky to make good returns when it comes to resource businesses. We can't say for sure which way commodity prices are going to go, or when. However, I think it's fair to say that no useful resource is going to go to $0 per unit – it's only going to drop so far. We just don't know if it's going to be a 10% fall or 50% fall.
A lot of resource prices go through cycles, whether we're talking about copper, iron, nickel, aluminium or even lithium. There are longer-term factors at play, but I think it's helpful to accept that there are going to be ups and downs.
With that in mind, I see sizeable falls (such as 20% or more) in resource prices and ASX mining shares as potentially opportunistic times to invest.
As recently reported by Bloomberg, lithium prices reached the lowest level in two years because of concerns about how strong demand from China will be. The lithium carbonate price has almost halved since June.
As Pilbara Minerals has pointed out, after the ramp-up of the P1000 expansion project, Pilgangoora is expected to be the second-largest producing hard rock lithium mine in the world, with an installed production capacity of around 1,000kt per annum. The ASX lithium share is also working on having a greater position in the lithium value choice, such as the joint venture with POSCO in South Korea for a lithium hydroxide facility. This could help Pilbara Mineral shares.
In the long term, the business is expecting demand to be driven by electric vehicles and batteries. The expected deficit in lithium is expected to be equivalent to between 12 to 20 Pilgangooras by 2040, which is dependent on potential supply coming online.
The relationship between supply and demand can't be ignored. If a substantial gap between supply and demand develops and keeps growing, that could lead to higher and higher lithium prices.
It's making good cash flow, has a large amount of cash on the balance sheet and is paying dividends. Pilbara Minerals is doing well at capitalising on the good lithium prices.
According to Commsec, the current Pilbara Minerals share price is valued at 8 times FY24's estimated earnings.
At this much lower price, I'd say it's a longer-term buy because of the outlook for lithium demand.
Pilbara Minerals shares are not risk-free
Miners do come with mining risks, though this ASX lithium share is operating in the very stable jurisdiction of Australia.
The biggest risk, aside from lithium price uncertainties, in my mind is that there's no guarantee that lithium will be the take-all winner of batteries in the future.
I don't know enough to analyse other battery technologies, but different materials are being looked at, such as vanadium. Hydrogen could also become a major competitor with how much money is being invested to turn it into a major commodity.
The electric vehicle supply chain is designed with lithium in mind, which entrenches its position. It'd take a long time for another resource to get to the same scale of production that lithium currently has. It's something to keep in mind though.
