Pilbara Minerals Ltd (ASX: PLS) shares have performed very well over the long term, and the company’s balance sheet could help push it to the next level.
Many investors pay close attention to how much profit a business makes, but examining the balance sheet can be equally important. Indeed, for ASX mining shares, having a good balance sheet could be the most important factor for success.
At the start of a miner’s life, a company is usually exploring or developing a project. There’s no revenue coming in, so having a strong cash balance is essential in progressing to a stage when there’s positive cash flow.
There will also likely be times when having a strong balance sheet is invaluable, such as when commodity prices fall heavily. It ensures the company’s survival and may even allow it to acquire a distressed competitor.
The strong balance sheet is a boost for Pilbara Minerals shares
Pilbara Minerals said in its most recent quarterly update for the three months to 31 March 2023 that its cash balance had increased by $457 million to $2.68 billion.
This strong cash position is enabling Pilbara Minerals shares to pay dividends and invest in the business for further growth. One example is the company’s P1000 project which aims to aims to increase the annual production run rate to one million dry metric tonnes (dmt) of nameplate spodumene concentrate once it’s fully commissioned. It’s planned to be ramped up by the September quarter of 2025.
When we look at the balance sheets of other ASX lithium shares, we can see that Pilbara Minerals is in a comparatively strong position. Pilbara Minerals has a market capitalisation of $14.5 billion, according to the ASX.
Liontown Resources Ltd (ASX: LTR) had $305.1 million cash in the bank at 31 March 2023, but also said it had completed the first drawdown of its Ford fund facility. Liontown has a market capitalisation of $6.5 billion, according to the ASX.
ASX lithium share Allkem Ltd (ASX: AKE) is aiming to merge with US lithium giant Livent. But, as a separate business, it had a net cash balance of US$577.9 million at 31 March 2023, which was an improvement of US$25.9 million over the quarter.
Rio Tinto Ltd (ASX: RIO) currently has a small position in lithium, but it is in the sector thanks to the Rincon project. The ASX mining share had a net debt position of US$4.2 billion at the end of 2022.
Mineral Resources Ltd (ASX: MIN) is another ASX lithium share, though it makes considerable non-lithium earnings. It had a net debt position of $1.4 billion at 31 December 2022.
Foolish takeaway
Pilbara Minerals seems to have the strongest balance sheet in the sector, and its cash pile continues to grow thanks to its cash flow. It’s putting its cash to good use within the business, while also paying investors a decent dividend in the meantime. The company’s P1000 project, and other projects, are compelling.
For the lithium aspect, I think Pilbara Minerals shares would be my choice within the sector, though the valuation of Mineral Resources also looks appealing with its diversified and growing project portfolio.
