Pilbara Minerals Ltd (ASX: PLS) shares have been a sensational investment for anyone who loaded up in 2020 or earlier.
The ASX-listed lithium producer has delivered a pleasant 348% return in the three years since, riding the monstrous boom in demand for the electrifying battery material. However, some enthusiasm around the company has been curbed on account of the sinking price for lithium.
In a mere 12 months, the price of lithium carbonate plummeted roughly 60%. Defying the descent of lithium prices, Pilbara Minerals' shares have only dropped 28% from their all-time highs.
The Aussie lithium leader goes for $3.90 per share, but I have a different price in mind before I'd go pulling the trigger on this ASX stock.
Underwhelming outlook for lithium
There's no getting around the fact that numerous analysts are now forecasting little to no growth in the near term for lithium prices. Elevated interest rates and a generally high cost of living are tempering electric vehicle sales — a primary driver of lithium demand.
Experts at Bank of America and Goldman Sachs are less optimistic about a significant price recovery. The headwind for Bank of America senior commodity strategist Michael Widmer is surplus production. Widmer notes that production remains elevated across operators, suggesting an ongoing supply glut.
Meanwhile, the team at Goldman has pulled together their estimates for the coming several years. As discussed by my colleague, the broker sees slight improvements in prices — across lithium carbonate, hydroxide, and spodumene — at best.
As such, I'd calculate my base case for buying Pilbara Minerals shares on the assumption that lithium prices stagnate around current levels.
When I'd buy Pilbara Minerals shares
I like to take a conservative approach when valuing a company to bake in a margin of safety. So I'll assume no production growth in the short term. Additionally, the price of lithium is approximately 30% lower than levels witnessed during Pilbara's first half in FY24.
Therefore:
FY2024 full-year revenue estimate = 613,000 tonnes x (US$1,645/tonne x 0.7)
FY2024 full-year revenue estimate = A$1,080 million
Much of the reduction in revenue will flow through to the bottom line due to fixed costs. Because of this, I'd estimate the Pilbara Minerals' earnings before interest, taxes, depreciation, and amortisation (EBITDA) could be around $350 million.
Take out depreciation and taxes, and I believe FY24 full-year net profit after tax (NPAT) could be in the vicinity of $180 million.
If I apply an 18 times price-to-earnings (P/E) ratio, the estimated market capitalisation of Pilbara Minerals would come to $3.24 billion. Today, the company is valued at $11.71 billion.
Based on these assumptions, I'd be looking to buy Pilbara Minerals shares for around $1.10.
A bullish view
However, there's every chance analysts are being too pessimistic about the future of lithium. What about a more bullish take on how the future could pan out?
What if interest rates were to fall later this year? Demand for EVs may quickly return, outpacing available lithium supply, pushing prices higher. Perhaps a 50% jump in the price of lithium isn't outside the realm of possibilities.
In addition, the company is working on increasing its production by 70%. If I were to assume that production rose 20% in the near term, what would estimates look like?
Revenue estimate = (613,000 tonnes x 1.2) x (US$1,645/tonne x 1.5)
Revenue estimate = A$2,776 million
Suddenly A$1.4 billion in NPAT seems feasible again. Throw an 18 earnings multiple on it, and Pilbara Minerals shares could be worth 115% more than they are today.
For now, I'll be erring on the side of caution, waiting for a more attractive price.
