There are a number of compelling businesses within the ASX lithium share sector that could be good investments.
Each lithium miner has its positives and negatives, and they're at various stages of progress. Some are only just developing the lithium discovery they've found, whereas others have been producing lithium for a while.
The lithium price has dropped from its highest level roughly a year ago, but it's still (very) high compared to prior levels. As well, there is projected to be significant long-term demand for lithium with the expected growth of electric vehicles and other battery uses. Certainly, I have that in mind with both of the following picks.
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Pilbara Minerals Ltd (ASX: PLS)
This ASX lithium share is one of the miners that is currently producing a lot of the commodity and capitalising on the appealing lithium price. Pilbara Minerals reported in the fourth quarter of FY23, it achieved a realised price of US$3,256 per tonne, down 33% year over year. But the average realised price in FY22 was US$2,382, so the company is seeing good operating conditions.
We don't know what the lithium price is going to do next but Pilbara Minerals is in a position to be making huge cash flow. At this stage, there are plenty of other lithium companies that aren't so they're missing out.
In FY23, revenue jumped 242% to $4 billion, net profit after tax (NPAT) soared 326% to $2.39 billion, and operating cash flow jumped 440% to $3.66 billion.
A lot of the company's valuation is backed up by a huge cash pile. Its cash balance went from US$592 million to $3.3 billion over the 2023 financial year. This can be used for paying dividends and to fund its growth projects.
I'm excited by the ASX lithium share's plans to grow its production to around one million tonnes per annum (up from 607kt in FY23) and also take a larger position in the lithium value chain (rather than just producing raw lithium), such as the POSCO joint venture hydroxide plant.
Pilbara Minerals is expected to generate earnings per share (EPS) of 50.3 cents in FY24, according to Commsec, which puts the ASX lithium share at nine times FY24's estimated earnings.
Mineral Resources Ltd (ASX: MIN)
My other pick is Mineral Resources, a business that mines both lithium and iron ore. It's also an important mining services provider.
One of the main reasons I like this ASX lithium share is because it's working hard to expand its operations in both iron and lithium, meaning it can increase its underlying value and grow profit and cash flow.
The company's EPS is projected to jump to $5.81 as its increasing production comes online. This would put the Mineral Resources share price at 12 times FY25's estimated earnings, with good earnings growth possible in the subsequent years.
There's also an added bonus of its 'energy' segment, which includes the North Erregulla-1 gas discovery, the Norwest Energy acquisition, and the Wonmunna solar array. To me, this side of the business is nice to have and has value, but isn't core.
