The Pilbara Minerals Ltd (ASX: PLS) share price is holding its ground this week despite Monday's announcement of an 89% dive in net profit after tax in FY24. As luck would have it, expectations leading up to the result had set a low bar due to the continued weakness in lithium prices.
For what it's worth, the fact that this lithium producer could post a profit at all speaks to Pilbara Minerals' low-cost advantage. However, a few slivers of information from the full-year report have raised my eyebrows.
I have no dog in the fight regarding Pilbara Minerals shares. The closest interest I have is a small investment in Albermarle Corporation (NYSE: ALB), but I am curious and concerned about where an investment in Pilbara Minerals will end up based on the company's current path.
Slow your roll
One metric that caught my eye immediately was Pilbara's production of 725,300 tonnes.
The production volume is not significant by itself; the volume change is what really matters. Pilbara Minerals boosted its production by 17% and increased sales by a similar 16% in FY24.
Now, I'm no mining expert, but I believe a common industry strategy is to reduce output while prices are low. This can help conserve and maximise the resource's value. Meanwhile, the Pilbara Minerals team chose to ramp up production in the weakening lithium market.
I'm willing to excuse this decision. After all, the company likely has large fixed costs to cover, and reducing production below a certain level would only harm the bottom line. The only alternative would be to make deep cost cuts.
Where I really begin to get nervous is when I see Pilbara Minerals pouring more capital into expanding.
The company is investing in the development of the P680 and P1000 projects. Additionally, Pilbara Minerals announced earlier this month that it is acquiring Latin Resources Ltd (ASX: LRS), which will also likely require investment to bring to production.
Moreover, Pilbara's current balance sheet is strong, holding a net cash position of $1,259 million. But now management has decided to add a $1 billion debt facility to its books to 'increase flexibility and liquidity'.
Call me a nervous Nellie, but I'd be apprehensive about adding a large loan to my company when it's hurtling towards loss-making. I'm not saying Pilbara Minerals will become unprofitable again, but it is uncomfortably close, and the future of lithium prices could be lower still.
Hefty price for Pilbara Minerals shares
My other worry centres around Pilbara Minerals' valuation.
The company currently trades on a price-to-earnings (P/E) ratio of 35 times FY24 earnings. It's not exactly 'cheap' when compared to other listed lithium players, such as the following:
- IGO Ltd (ASX: IGO) — 16 times earnings
- Mineral Resources Ltd (ASX: MIN) — 22 times earnings
- Arcadium Lithium CDI (ASX: LTM) — 8 times earnings
I don't know Pilbara Minerals intimately enough to say that a 35-times earnings multiple isn't warranted. However, on a high-level relative P/E ratio assessment of its peers, it looks a little pricey. This might explain why the Pilbara Minerals share price remains the most shorted share on the ASX.
Still, the low-cost lithium miner might just prove all the doubters wrong in time.
