Lithium is the energy storage metal in batteries. It is the only material that can be used in electric vehicle batteries due to a combination of being lightweight and its energy density.

Batteries accounted for 90% of global lithium demand in 2024, and nearly 50% of demand came from electric vehicles. EV sales will be the largest lithium demand driver in the future. We see EVs growing from 14% of global auto sales in 2024 to 33% in 2030. This should lead to global lithium demand growing from 1.2 million metric tons in 2024 to 3.2 million in 2030.

The main valuation driver for Pilbara is the lithium price. Here, we forecast a recovery. We expect lithium prices to be about USD 20,000 per metric ton by the end of 2026, before moderating to roughly USD 15,000 per metric ton at midcycle.

Based on our estimates of a recovery in lithium pricing two ASX listed lithium miners are screening as undervalued.

Pilbara Minerals (ASX: PLS)

Shares are trading at a 62% discount to our $3 fair value estimate.

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, is slated to complete in February 2025. The all-scrip offer is valued at about AUD 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 AUD 0.50 per share or about 15% of our fair value estimate.

We award Pilbara Minerals a narrow economic moat

Pilbara’s hard-rock Pilgangoora mine in Western Australia produces lithium spodumene concentrate at a low cost of production, generating economic profits at most lithium prices. We estimate its cash costs are around the breakpoint of the first and second quartile on the 6%-grade spodumene concentrate cost curve. With about 20 years left on current reserve estimates, Pilgangoora has sufficient remaining life to warrant a moat.

We estimate that Pilgangoora’s cash costs will average about USD 400 per metric ton over the next decade, which is below our midcycle price forecast for spodumene concentrate of USD 1,200 per metric ton. This places the mine at the bottom end of the hard rock lithium cost curve. We estimate returns on invested capital will comfortably exceed our assumed 11% weighted average cost of capital with ROIC of 24% at the midcycle.

Pilbara Minerals owns the Pilgangoora mine, which consists of two operating plants in the Pilbara region of Western Australia. The Pilgan plant produces spodumene and tantalite concentrates as a byproduct. The smaller Ngungaju plant produces a spodumene concentrate. However, this smaller plant has higher operating costs. As of late 2024, the Ngungaju plant is under care and maintenance, with operations paused while global lithium prices remain low.

Pilbara is the world’s second-largest hard rock lithium operation after IGO’s Greenbushes mine, also in the Pilbara region of Western Australia. The mine mainly produces spodumene concentrate, the feedstock for the battery compound lithium hydroxide. Pilgangoora is strategically located about 130 kilometers from the nearest port by road, from where its spodumene concentrate is shipped, with most sales via offtake agreements with Chinese companies.

IGO Ltd (ASX: IGO)

IGO shares are trading at a 42% discount to our $6.50 fair value estimate.

IGO’s primary asset is a noncontrolling 25% stake in the Greenbushes mine, the world’s largest and lowest-cost hard rock lithium operation. The mine is operated by Talison Lithium, a joint venture between IGO, Albemarle, and effective-controller Tianqi Lithium. IGO is entitled to a dividend from Talison, paid out of free cash flow.

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 Greenbushes operation. Two new concentrator plants are expected to be in operation by the end of the decade, which would see spodumene concentrate production capacity increase to around 2.5 million metric tons per year from a fiscal 2023 nameplate capacity of 1.5 million metric tons.

Through a joint venture with narrow-moat Tianqi Lithium, IGO also owns a 49% interest in the Kwinana lithium hydroxide refinery. Lithium hydroxide is primarily used to produce cathode materials for lithium-ion batteries. The spodumene feedstock for Kwinana is sourced from Greenbushes. We see Kwinana as cost-disadvantaged relative to hydroxide refineries in China, where capital intensity and operating expenses are significantly lower. However, while not our base case, Kwinana could attract a premium for its product in a scenario where geopolitical tensions escalate, and supply chain security becomes front of mind.

Kwinana’s first train has been hamstrung by engineering issues since production began in 2022 and still operates below capacity. In early 2025, IGO announced it will cease work on its partially completed second train, though we think it will revisit the business case if lithium prices recover. On our forecasts, the remaining capital required to complete Train 2 essentially offsets discounted future cash flows, so our fair value estimate for IGO is unaffected.

IGO also owns and operates the Nova nickel-copper-cobalt mine, which has roughly two years of remaining life.

We award IGO a narrow economic moat

Greenbushes is the highest-quality hard rock lithium operation in the world. The mine produces spodumene concentrate, the feedstock for the battery compound lithium hydroxide. Greenbushes’ cash cost of around USD 200 per metric ton in fiscal 2024 sits comfortably below our long-run price forecast for spodumene concentrate of USD 1,200 per metric ton and places the mine at the bottom of the hard rock lithium cost curve. With around 20 years left on current reserve estimates, Greenbushes has enough remaining life to support a moat.

IGO is a minority shareholder in the Greenbushes operation with an economic interest of 25%. Joint venture partner narrow-moat Tianqi Lithium has a controlling 26% stake, and narrow-moat Albemarle holds the remaining 49%. IGO’s stake in Greenbushes comprises the vast majority of its fair value.

Tianqi and Albemarle are each entitled to 50% of Greenbushes’ spodumene (lithium mineral) concentrate output, with nominations made a quarter in advance. Pricing is reset monthly as an average from four price reporting agencies. Cash flow, net of mine working capital requirements, is returned to IGO via a quarterly dividend. We expect Greenbushes’ return on invested capital, or ROIC, to comfortably exceed our assumed 11% weighted average cost of capital, or WACC, for the next 15 years, and average more than 50% over our 10-year explicit forecast period.

Through its joint venture with Tianqi Lithium, IGO has a 49% economic interest in the Kwinana lithium hydroxide refinery. Tianqi’s share of spodumene from Greenbushes is preferentially processed at the Kwinana refinery, with surplus concentrate exported to Tianqi refineries in China. Kwinana is not a cost-advantaged lithium hydroxide producer. China processed around 60% of global lithium battery chemicals in 2023, as per data from the International Energy Agency. And the capital intensity of refining in China is significantly lower than in Australia, as are operating costs, including labor. We estimate Kwinana sits in the top half of the lithium hydroxide production cost curve.

Kwinana’s first train, which began production in 2022, has faced considerable challenges and is still running well below capacity. IGO and Tianqi ceased construction of the partially-completed second train in early 2025. We think the joint venture might consider resuming the project if prices recover. We forecast IGO’s share of Greenbushes’ net profit after tax to average around AUD 600 million per year for the five years to fiscal 2029, more than the remaining capital required for Train 2—around AUD 750 million, on our estimates. Kwinana accounts for a small fraction of our fair value estimate for IGO, and we don’t see the refinery as material enough to detract from IGO’s moat overall.

IGO’s nickel business is not moatworthy. The Nova mine has a short remaining life of around two years. ROICs would need to exceed WACC for at least the next 10 years for moat consideration. IGO’s nickel assets are immaterial to our valuation.

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Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.

Uncertainty Rating: The Morningstar Uncertainty Rating assesses business risk and our analysts’ ability to gauge Fair Value. Mark LaMonica discussed business risk in more depth in this article.