Pilbara Minerals shares: the good, the bad, and the risky

Pilbara Minerals shares have been an ASX penny stock trader’s dream. The lithium mining stock is up 143% over the past year, and an incredible 3,800% to AU$5.07 since its Initial Public Offering in 2007.

However, just two weeks ago, Pilbara Minerals shares were changing hands for AU$5.42. Is this a normal dip for a rocketing stock, or the start of a sustained correction to reality?

Pilbara Minerals share price: the good

Pilbara Minerals operates and has a 100% interest in the Pilgangoora Project near Port Hedland in Western Australia, widely regarded as one of the largest hard rock lithium deposits in the world.

At its most recent offering at the online Battery Material Exchange, Pilbara accepted a pre-auction offer of US$7,100 per dry metric tonne (dmt) for a shipment of 5,000dmt of spodumene concentrate on a 5.5% lithia basis.

This sale yet again represents a higher price than it received at last month’s auction, and will bring in US$35.5 million in revenue. Sold before its planned auction even began, the ASX lithium stock has demonstrated that near-term demand for lithium remains strong, despite fears of a wider economic slowdown both in China, the company’s largest market, and globally.

Macquarie cited the sale as key to its current ‘outperform rating.’ With an AU$5.70 price target, the financial services group now expects the lithium miner to ramp up production at its Ngungaju Project to generate even more sales.

And encouragingly, Managing Director and CEO Dale Henderson recently told investors that ‘the Ngungaju Plant is on-track to achieve its nameplate production capacity of ~180,000- 200,000tpa during the September Quarter of 2022.’

In the 12 months ending 30 June 2022, Pilbara Minerals saw revenue increase by 577% to AU$1.19 billion. However, as spodumene concentrate shipped rose by only 28% year-over-year to 361,035dmt, this revenue explosion is predominantly down to the rocketing lithium spot price rather than vastly increased production.

Henderson argues that the company is in an ‘enviable position,’ saying that ‘FY2022 has been an incredible year for Pilbara Minerals, with our Pilgangoora Operation capitalising on the surging demand for lithium raw materials that we have experienced over the course of the year.’

The ASX company has its quarterly activities report out next week, which could send the share price even higher. The CEO has previously enthused that the ‘chemicals participation with our downstream JV with POSCO and our midstream project provides another extension of value creation for our shareholders.’

Pilbara Minerals also holds $714.3 million in net cash, a useful position in a time of rising interest rates. And Credit Suisse analysts believe it could even start delivering a dividend of 29 cents per share in FY23, a sign that the AU$15 billion ASX stock could be reaching maturity.

…the bad

However, Red Leaf Securities CEO John Athanasiou thinks that ‘investors may want to consider cashing in some gains,’ given the skyrocketing revenue. While this isn’t a particularly negative outlook, some early speculative investors may choose to cash in enough shares to recover at least their initial investment, which could put downwards pressure on the share price.

But the key danger is that as a pure-play lithium stock, Pilbara Minerals is wholly dependent on the lithium spot price. And Benchmark Mineral Intelligence recently reported that Chinese battery-grade lithium carbonate is now at a record $74.475 a tonne, having more than doubled year-to-date.

With Goldman Sachs having already released a bearish view of the metal earlier this year, it’s fair to question whether, given the typically cyclical nature of commodities, this price point is sustainable.

Of course, in the long term, global EV battery demand is expected to outstrip current supply by a wide margin. But it’s worth noting that UBS has rated the Pilbara Minerals a ‘sell,’ with a price target of just AU$2.65.

…and the risky

A recession in China could seriously dent the price Pilbara can get for its lithium, especially given the country’s rapidly growing importance in the EV market amid strong political support. This is a view held by Morgan Stanley analysts, which contributed to the stock’s price fall to AU$4.70 last week.

And even if prices remain high, the company operates in a ’price taker’ industry. If profits remain high, more operators will pile in, putting pressure on the supply side of the supply and demand equilibrium.

Of course, few saw the unrealised potential of Pilbara Minerals before it rocketed to ascendancy. Only volatility can be reliably projected.

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