The Pilbara Minerals Ltd (ASX: PLS) share price has declined by 26.60% in the last three months, as shown on the chart below. Sometimes, major declines can lead to opportunities.
And since 11 August 2023, the Pilbara Minerals share price has dropped 44%.
It's understandable why the ASX lithium share has declined – the lithium price has fallen significantly. In the FY24 fourth quarter update, the business reported that its realised price for its spodumene concentrate for the whole of FY24 was down 74% to US$1,176 per tonne from US$4,447 in FY23.
Mining businesses are very exposed to commodity prices because of the operating leverage they have. Mining costs don't change much from month to month or even year to year, whereas the commodity price can change significantly. When prices rise significantly, the revenue dollars can largely add straight onto the net profit line, aside from payments to the government.
But, profit can get slammed when resource prices fall.
Weak lithium price
When I think about commodity businesses, they can be excellent cyclical opportunities when prices are low and markets are fearful.
But not every commodity is guaranteed to rebound. We've already seen how nickel prices are staying low amid cheap supply from Indonesia, leading to BHP Group Ltd (ASX: BHP) deciding to stop producing nickel and taking a large impairment charge.
However, pleasingly, compared to the three months to March 2024, prices increased by 4% to an average estimated realised price of US$840 per dry metric tonne (dmt) (CIF China). That's only a small amount of the decline that has been clawed back, but it is progress and going in the right direction.
At the end of the quarter for the three months to 30 June 2024, Pilbara Minerals completed price reviews with two major offtake customers, resulting in "improved pricing outcomes relative to the current pricing formula", which are expected to be realised in the three months to September 2024.
Is this a good time to buy Pilbara Minerals shares?
Pilbara Minerals recently announced it was launching a takeover to buy Latin Resources Ltd (ASX: LRS). Latin Resources owns the Salinas spodumene project in Brazil, which has the potential to become a top-10 hard-rock lithium project excluding Africa.
Broker UBS is concerned about an oversupplied lithium market, which could weigh on prices for the next one to three years. However, UBS did note that the Salinas project offers diversification beyond the Pilbara region.
Commenting on the market, UBS said in a note on 15 August 2024 that GFEX futures were down around 10% over the week "amid reports of very subdued China domestic carbonate demand with only ~210t of ~900t tender managing to sell." UBS then noted:
We haven't seen a supply response yet to justify price normalisation as demand remains soft.
UBS rates Pilbara Minerals shares as a sell, with a price target of $2.50. The company is projected to have made $328 million in net profit in FY24 and to make $242 million in NPAT in FY25.
I wouldn't call the ASX lithium share a buy until it seems lithium demand can outstrip supply over the medium term. But brave investors may want to buy at this beaten-down price before there's a possible recovery. It will be interesting to see how the market reacts to next week's report.
