Where does Pilbara Minerals go from here?

Wed 01 Jun 22, 3:24pm (AEDT)
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Key Points

  • Pilbara Minerals opens -4.75%, closes -22%
  • Selloff catalysts include bearish broker notes and an Argentinian reference price for exports
  • Vulcan Energy and Nickel Mines might have hints for what's next

Lithium stocks have been absolutely gutted on Tuesday, with heavyweight Pilbara Minerals (ASX: PLS) headlining the losses, down -22% to a 6-month low.

When an upwards trending stock falls, we call it a pullback. When a downward trending stock rises, we call it a bounce. But how does one interpret an unexpected selloff of this magnitude?

Set the scene

Goldman Sachs and Citi turned into lithium bears this week, saying that the top is in for the lithium sector.

The Argentina government established reference prices for lithium carbonate sales, set at US$53 per kilogram for exports to countries including the US, China, Japan and South Korea.

Lithium carbonate spot prices is currently 468,500 yuan (US$70,000) a tonne, according to TradingEconomics. So the reference price suggests a potential -33% discount from spot prices.

The reference price a developing story, its implications for ASX-listed Argentina-based producers still requires more clarification.

Breaking down the price action

From a technical perspective, Pilbara Minerals opened -4.75% ($2.81), spend the whole day selling off and closed -22% ($2.30).

PLS 2022-06-01 14-20-43
Pilbara Minerals 1 minute price chart (Source: TradingView)

The selloff was on heavy volume, around 130m shares, compared to the stock's 20-day average of 26.6m (excluding today). Its also the highest volume we've seen since last September.

PLS 2022-06-01 14-15-53
Pilbara Minerals daily chart (Source: TradingView)

Now imagine you're a buyer today. Pilbara Minerals has been selling off for most of the day, it's likely that most buyers are underwater.

What's next?

The most accurate answer is - who knows?

Is the stock technically oversold? Yes.

RSI dipped from 57 (slightly overbought) to 35.5 (oversold).

Is the Argentina news a big deal? Possibly.

Although Pilbara Minerals produces lithium out of its Pilgangoora Project in WA.

What has to be acknowledged is that a selloff of this magnitude - in terms of both % decline and relative volume - takes the life out of a stock's momentum. Even if, contrary to Goldman and Credit Suisse views, that lithium remains a bullish sector.

Two recent examples include Vulcan Energy (ASX: VUL) and Nickel Mines (ASX: NIC).

  • 29 Oct 2021: Vulcan sold off -16.5% after a scathing short-report

  • 9 March 2020: Nickel Mines was down -4.7% (but an almost -40% drawdown 8 March peak to 9 March trough) due to a major shareholder getting caught in a nickel margin call

2022-06-01 14 38 28-NIC 2022-06-01 14-37-47.png ‎- Photos
Nickel Mines (left) and Vulcan Energy (right) price charts (Source: TradingView)

The two stocks, even after clarifying and resolving the catalyst which caused the selloff, weren't quite the same afterwards - even though many lithium and nickel peers kept on rallying until late April.

Food for thought

The selloff isn't isolated to just Pilbara Minerals but the broader lithium and green metals sector. Stocks across nickel, cobalt, uranium and more have been subject to quite a brutal correction.

The other consideration is that Goldman and Citi have released research reports about why the top is in for lithium. Funds could be using these reports to reduce their exposure to lithium names.

The million dollar question is - where do all the capital outflows go? Is it into a new, under-the-radar commodity? A new sector? Or nowhere.

Written By

Kerry Sun

Content Strategist

Kerry holds a Bachelor of Commerce from Monash University. He is an avid swing trader, focused on technical set ups and breakouts. Outside of writing and trading, Kerry is a big UFC fan, loves poker and training Muay Thai. Connect via LinkedIn or email.

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