This top broker says the Pilbara Minerals share price is going to crash 35%

This ASX lithium share is significantly overvalued, according to this broker.

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One of the leading brokers in Australia has forecast that the Pilbara Minerals Ltd (ASX: PLS) share price will fall more than 30% over the next 12 months.

This negative outlook comes after the ASX lithium share's valuation recently recovered some of its losses, rising 13% in the past two months, as the chart below shows.

However, UBS believes the ASX mining share is priced too highly in the current environment.

Negative Pilbara Minerals share price target

A price target is where a broker thinks the share price will be in 12 months from the date of the broker's note.

UBS' price target, given in April, on the ASX lithium share is just $2.70. That implies a possible fall of 35% over the next year, which would be a substantial decline.

The broker only expects Pilbara Minerals to generate net profit after tax (NPAT) of $353 million in FY24 and $366 million in FY25, compared to the $2.39 billion NPAT it generated in FY23.

UBS also suggested the business will see negative free cash flow in FY24 and FY25 as the company invests heavily in initiatives to lift production, including the P1000 project.

Why is the broker pessimistic?

UBS believes the current Pilbara Minerals share price implies a lithium price far above the current spot price and the longer-term forecast.

The broker's estimate for spodumene concentrate for FY25 is US$1,125 per tonne and believes the market is pricing in around US$1,710 per tonne. UBS' long-term lithium price forecast from 2030 is US$1,400 per tonne. Therefore, UBS is implying there is a disconnect between Pilbara Minerals' actual profit potential and how much profit the market is implying the miner can generate.

However, the broker noted the ASX lithium share is on track to reach the high end of its FY24 guidance of between 660kt and 690kt, and that the miner "continues to execute well on production and growth plans."

UBS believes Pilbara Minerals' balance sheet is "still strong and a competitive strength", though the cash balance is declining. The broker expects the cash balance to finish FY25 at $1.25 billion, down from $1.78 billion at 31 March 2024.

Pilbara Minerals share price valuation snapshot

According to UBS' forecasts, the ASX lithium share is priced at more than 34x FY25's estimated earnings at its current level. The valuation then improves to 23x FY26's estimated earnings, which is still quite high for a large miner.

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.

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