We add Pilbara Minerals (ASX: PLS) to our Best Ideas List. We think the market takes a different view on the outlook for lithium prices, the key valuation driver for Pilbara. Lithium trades well below our estimate of the marginal cost of production, and we expect prices to recover as end-market demand grows and higher-cost supply exits.

Pilbara’s primary asset is the Pilgangoora mine, where capacity projects and operating efficiencies completed over fiscal 2025 have improved unit operating costs and production volumes. Pilgangoora produces some of the world’s highest quality hard rock lithium, with cash costs at the lower end of the cost curve. Its balance sheet is very strong with about $1 billion in cash and no major capital investment expected in the near term.

We expect lithium demand to nearly triple by 2030 from levels in 2023, largely driven by electric vehicle sales. To support this, the firm has further expansion plans and sufficient mine reserves for over 20 years of operation at its main Pilgangoora mine.

Latest results

Pilbara Minerals’ fiscal 2025 revenue of $769 million fell by 39% on the prior year, driven by 43% lower realized prices, with 7% higher sales volumes a partial offset. Unit operating costs fell by 4% with mine expansion and operating efficiencies.

Why it matters: We view fiscal 2025 as a stabilizing year for Pilbara. Completion of its plant expansion drives ongoing lower unit costs and higher production volumes, and marks the end of the high-cost capital projects for now.

  • We estimate unit operating costs (free on board, excluding freight and royalties) averaging about $590 per metric ton of ore mined, about 6% lower than fiscal 2025 unit costs. Lower costs are from higher production volumes and strategic projects to improve operational efficiency.
  • We expect production volume in fiscal 2026 of about 850 kilotons, about 13% higher than fiscal 2025 with the completed plant expansion. We think the smaller and higher operating cost Ngungaju plant will remain on care and maintenance in fiscal 2026, until lithium prices recover.

The bottom line: We cut our fair value estimate for narrow-moat Pilbara by 7% to $2.80, primarily reflecting weaker expected near-term lithium prices and earnings. Additionally, capital expenditure of about $320 million in fiscal 2026 is higher than our prior estimates. Shares screen as materially undervalued.

  • Our downgraded lithium carbonate price over fiscal 2026 is about 25% lower at USD 14,000 per metric ton. Nonetheless, we expect prices to rise in 2026, spurred by supply cuts. We estimate prices rising to our marginal cost of production, about USD 20,000 per metric ton over 2026.

Big picture: Pilbara has a very strong balance sheet, with about $1 billion in cash as of June 30, 2025. We forecast cash building over our explicit forecast period as higher lithium prices lift earnings. As cash accumulates, we think Pilbara is likely to prioritize organic investment and further acquisitions.

Pilbara Minerals achieves higher sales volumes, albeit lower lithium prices

Pilbara Minerals’ primary asset is the Pilgangoora mine, the world’s second-largest hard rock lithium operation. Pilgangoora consists of two operating plants, Pilgan and Ngungaju. Both produce a spodumene concentrate, while Pilgan also produces tantalite, a byproduct of this process.

As electric vehicle adoption increases, we expect high-double-digit annual growth in global lithium demand. To capitalize on this, plans are in place to expand the Pilgangoora operation. A new processing plant is expected to be in operation by 2031, which would see spodumene concentrate production almost triple to an average of 1.9 million metric tons per year for a 10-year period from a fiscal 2024 nameplate capacity of about 680 thousand metric tons. We estimate Pilgangoora has about 20 years of mine life remaining at the increased run rate.

As of late 2024, the smaller Ngungaju plant is under care and maintenance, with operations paused while global lithium prices remain below its operating costs. We estimate Ngungaju contributes about one-fifth of current production capacity and is more expensive to run than the Pilgan plant. We estimate it will resume operating in fiscal 2027, in line with our expectation of recovering lithium prices.

The acquisition of Latin Resources, a hard rock lithium project in Brazil completed in 2025. The all-scrip offer was valued at about $600 million, but we estimate Latin Resource’s enterprise value is greater than AUD 1 billion, using our lithium price estimates. We value the new business at $0.40 per share or about 15% of our fair value estimate.

Bulls say

  • As a low-cost spodumene operator, Pilgangoora should earn returns above WACC in most lithium price environments.
  • As a lithium pure play, Pilbara Minerals is well-positioned to benefit from EV growth through lithium batteries.
  • A healthy balance sheet provides ample capacity for growth initiatives, like production expansion at Pilgangoora and acquisition of Latin Resources.

Bears say

  • Lithium prices may not recover to our midcycle assumption if electric vehicle demand grows more slowly than expected.
  • Forecasts of Pilbara’s revenue and profit growth depend on its expansion in the midterm.
  • The expected acquisition of Latin Resources in Brazil introduces heightened geopolitical risk, including the risk of an increase in company taxes and royalties.

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