Only one of these two lithium stocks is a buy

Despite lithium carbonate prices falling around 60% since the beginning of the year, locally listed players continue to enjoy their time in the sun. 

Take Latin Resources (ASX: LRS), for example, which has soared 242% since the beginning of the year. Or Pilbara Minerals (ASX: PLS), up 29%. Or Liontown Resources (ASX: LTR), which after a takeover offer, has lifted 123%. 

In comparison, diversified player Mineral Resources (ASX: MIN) had sunk 14% into the red before today's result, which has seen the stock surge nearly 7% higher. 

That said, increasing capital expenditure, or CapEx, continues to weigh on sentiment, particularly at a time when investors are hungry for cash. 

Marcus Today's Henry Jennings analyses two solid results from this bunch - Mineral Resources and Pilbara Minerals - and reveals why only one of them is a buy today. 

He also outlines why he believes the outlook for lithium players still looks compelling, particularly compared to the copper story. 

Key Results 

Pilbara Minerals

• Revenue of $4.06 billion, up 242% from the pcp vs. $4.08 billion expected by analysts

• EBITDA of $3.32 billion, up 307% from the pcp vs. $3.34 billion expected by analysts

• Underlying net profit of $2.28 billion, up 329% vs. $2.28 billion expected by analysts 

• Final dividend of 14 cents per share

Mineral Resources

• Revenue of $4.8 billion, up 40% pcp vs. $4.72 billion expected by analysts 

• Adjusted EBITDA of $1.75 billion up 71% from the pcp, vs. $1.74 billion expected by analysts 

• Underlying net profit $769 million up 92% from pcp vs. $673 million expected by analysts 

• Fully franked final dividend 70 cents per share, total dividend of $1.90 

Key company data for Mineral Resources 

Source: Market Index

Key company data for Pilbara Minerals 

Source: Market Index

Marcus Today's Henry Jennings

Note: This interview took place on 29 August 2023. 

1. In one sentence, what was the key takeaway from these results?

It was a pretty solid result for Pilbara. The concern was CapEx going forward. There was an increase there, but it has a huge cash pile, and it was a little bit disappointing on the dividend.

For Mineral Resources, it was another solid result from them, somewhat more complicated in terms of iron ore exposure but a pretty solid result. A beat in some areas, again issues with CapEx and costs increasing which is part and parcel of mining stocks at the moment.

2. What was the market’s reaction to these results? In your view, was it an overreaction, an under-reaction or appropriate?

The market sold off quite heavily on the back of Pilbara’s CapEx guidance, which was above analysts' forecasts, and it also sold off yesterday, hitting the bottom end of its trading range at around $4.50. It has rallied a little bit today.

There is a big short position in this stock and the path of least resistance did seem to be down. As I said, there was a little disappointment that maybe the dividend was light on, and the market was hoping, I suspect, for a little bit more generosity from the company and that CapEx number was of concern.

For Mineral Resources, there were beats in places and the dividend was a beat as well. So that came in pretty much above expectations. The stock has rallied more than 6% on the back of those results which I think is a pretty fair assessment. Given the fall that Mineral Resources had had previously, and I guess to do with the iron ore price as well, which has been slightly better. We are seeing some optimism return to BHP (ASX: BHP) and Rio Tinto (ASX: RIO), which certainly helps Mineral Resources.

3. Were there any major surprises in this result that you think investors should be aware of?

For Pilbara, its cash remains a massive attraction. What it does with that cash remains to be seen but certainly, there are no requirements for it to go to the market for any kind of funding. Part of that CapEx increase had to do with the increase in production it is targeting to a million tons per annum under the P1000 expansion project. So some of that CapEx could be explained away. 

In terms of Mineral Resources, I don't think there were too many surprises here. Again, CapEx is increasing, but it was a pretty solid beat on the dividend as well. The stock has been under some pressure. It's a more complicated story than Pilbara because of the iron ore exposure. It's not just pure lithium. Once again, we are still seeing some issues with some of the lithium production going forward. So that is possibly a little bit of a negative

4. Would you buy, hold or sell MIN and PLS on the back of these results?

PLS Rating: BUY

I still think Pilbara is a buy here. I can't believe that one of the majors hasn't looked at this one. It upgraded the resource which was a little unexpected by 35% as well. So that was a serious positive. 

MIN Rating: HOLD

Mineral Resources is very much beholden to the iron ore price, and although to some extent that is ticking up, the stock is definitely a hold here. I'd say it's probably an "accumulate" on any weakness, but it is showing some good signs of life and these results will certainly help with sentiment around the stock.

5. What’s your outlook on PLS and MIN and the sector over the year ahead? Are there any risks to this company and its sector that investors should be aware of?

The lithium sector always has serious risks - not least of which is the lithium price itself, which does not have the most transparent pricing. It has stabilised, but certainly, there is volatility in this space. 

It’s a maturing space as well. Gone are the days of throwing money at the wall and hoping it sticks. I think investors in the lithium space have to be more discerning. Maybe some heat has come out of the lithium market, but certainly, I think there will still be life in this thematic for many years to come.

I know what you are thinking... If lithium isn't as hot as it once was, is copper the new lithium? Everyone loves the copper story, but there are very few ways pure copper plays in Australia. You're really down to Sandfire (ASX: SFR) as the pure copper play. Otherwise, you're looking at BHP and Rio in the big cap space. It's a good theme. There's no doubt that copper is problematic in terms of supply and demand, but it is harder to play that from a pure copper basis on the ASX. 

I think lithium is still a hot sector. It just depends where you are located. It was Australia and the Pilbara for a time, then it was Africa, and now it's moving a little bit towards James Bay, Canada. That seems to be one of the hot areas. But there are some very interesting emerging explorers and producers coming through in the lithium space.

6. From 1-5, where 1 is cheap and 5 is expensive, how much value are you seeing on the ASX right now? Are you excited or are you cautious about the market in general?

Rating: 2.5 

The market is probably a 2.5 - it's in the middle as we head into September, which can be a bad month globally. In terms of markets, I think it's neither cheap nor expensive. It's very stock-selective at the moment post-reporting season. Clearly, the Fed's going to hold the key at the end of September, but I think we're still going to move sideways from here. 

This article was first published for Livewire Markets on Tuesday, 29 August 2023.

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