Pilbara Minerals Ltd (ASX: PLS) and Mineral Resources Limited (ASX: MIN) are two shares that investors have been keeping a close eye on. Pilbara Minerals is the smaller of the two companies, but it has some big plans for future growth.
It's no secret that the potential for abundance within the electric vehicle market and other battery applications has the lithium sector booming. But, one fund manager believes there could be more value in Mineral Resources than its high-flying pure-play peer.
Let's take a look at how Pilbara Minerals compares, according to this expert investor.
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Comparing the pair
To say that the ASX lithium space is rife with speculation would be somewhat of an understatement. Uncapped exuberance has spilled over as the beginning of an electric era dawns. Projections of a sixfold increase in lithium consumption under the International Energy Agency's net-zero by 2050 emissions scenario offers a peek into what could be ahead.
However, Airlie Funds portfolio manager Emma Fisher thinks there is still relative value to be found within the red-hot industry. In a self-published article on Livewire last week, Fisher gave her take on "The cheapest lithium stock in the market".
Although, perhaps to the surprise of some investors, it was not a 'pure-play' candidate among the ASX ranks. Instead, the fundie with over 10 years experience pointed out the recently battle-hardened mining services company Minerals Resources.
Comparing the two, Fisher noted that both mining companies currently have a similar spodumene capacity. Across its Pilgan and Ngungaju plants, Pilbara Minerals' assets add up to 536 kilotonne (kt) per annum of capacity. Meanwhile, Mineral Resources' share of its Mt Marion and Wodgina operations equate to 535kt per year.
Furthermore, both lithium contenders have plans for future expansion. The Pilbara Minerals share price has surged on the miner's ambition to produce 1 million tonne of spodumene annually in the future. Similarly, the company intends to reach an estimated 13kt of lithium hydroxide production capacity within 3 years.
Simultaneously, Mineral Resources will be charting its own course toward an estimated 40kt to 45kt of lithium hydroxide production over the same period.
Pulling it all together, within three years Mineral Resources and Pilbara Minerals will have similar spodumene production and Mineral Resources will be producing three times more lithium hydroxide.
Emma Fisher, Airlie Funds
More value outside the Pilbara Minerals share price?
After mapping out forecasts, the Airlie Funds portfolio manager deduces that Mineral Resources would likely be making more money from lithium than Pilbara Minerals 3 years from now.
Specifically, Fisher estimates it would be around $1 billion in earnings before interest, tax, depreciation, and amortisation (EBITDA) for Mineral Resources. Whereas the pure-play lithium company has a FY24 EBITDA forecast of $569 million.
As a result, Mineral Resources would be valued at 7 times FY24 EBITDA. Meanwhile, the Pilbara Minerals share price puts a near 13-times valuation on the company's FY24 EBITDA. This stark difference in valuations is only exacerbated once we account for Mineral Resources' other businesses.
Importantly, Fisher notes that Minerals Resources' mining services and iron ore businesses are being ascribed little to no value. This is despite the iron ore business pulling in $1.5 billion of EBITDA last year.
Finally, Emma Fisher is not alone in seeing value in Mineral Resources. Analysts from Macquarie Group hold Pilbara Minerals and Mineral Resources shares as their ASX lithium picks.
The Pilbara Minerals share price is up 437% in the past year. In contrast, the Mineral Resources share price is up only 50%.
