Pilbara Minerals (ASX: PLS) was up 5% and change on Wednesday, back down 5% on Thursday. There is, as we might say, a certain nervousness about PLS stock, as there is about the lithium sector more generally. The underlying problem is that all can see that lithium is hugely valuable right now - but is it going to remain so into the future? There historical minerals pricing patterns are much more disheartening.
The basic deal at Pilbara is that it's the result of one of the truly great bargains in mining industry history. Back in 2013 or so there was a run up in the lithium price. This meant more exploration, more mines tried to come online. One, within a company called Altura, got financed, went into production and then went bust. It went bust because the finance costs could not be covered by the now low - low because lots of mines got financed - lithium price. Pilbara bought that mine out of the bankruptcy and then, almost exactly then, the lithium price soared again. Pilbara has near 50% net profit margins on $2 billion of sales as a result. The timing was exquisite.
Pilbara Minerals share price from ASX
So, great, Pilbara is very valuable. But given that variability of the lithium price for how long? Pilbara's finances are strong, so that's not a worry. But if high lithium prices bring forth new lithium mines - they do - then how long will the lithium price stay high? After all, that China lithium price is down 40% over the last few months already.
This is more than just a worry about Pilbara Minerals. It's something that crosses the entire lithium sector. It's entirely true that minor metals shortages lead to a boom in prices. But there's no physical shortage of any of these elements. Only a shortage of mines and processors who can turn dirt into the lithium we want to use. So, the shortage and the high prices will only last as long as it takes to finance and build new mines and processors.
This is just the way minor metals work. Price boom followed by price bust as supply expands - usually over-expands - to meet the new demand. In fact, a useful rule is that this will happen, it's just a matter of when? So, investment in the mining stocks for minor metals is always a matter of catching the price wave - we know, or at least should strongly suspect that high prices will be followed by more competition and thus low prices. So, along with the question of who to buy we also need to worry about when - not if, but when - to sell.
Current predictions are that lithium will be in over-supply in this and the next couple of years. That's going to do a number on the lithium price and, therefore and maybe, on the prices of lithium miners.
