Category: Stock Market

Investing in ASX shares can be an effective way to build passive income. But how much would one need to invest on the Aussie stock market to build $65,000 of annual retirement income?

Well, that depends on many factors. Namely, an investors’ time frame, risk tolerance, and investing strategy.

Investing for retirement income

Building a retirement income on the ASX might sound daunting, or even daring, but it needn’t be. Buying ASX shares is essentially buying a piece of a business.

Businesses with strong track records, experienced management, and competitive business models are likely to continue operating, and growing, for years and decades to come.

Take the likes of Commonwealth Bank of Australia (ASX: CBA), BHP Group Ltd (ASX: BHP), and the company behind Bunnings and Kmart, Wesfarmers Ltd (ASX:WES), for example.

Many such businesses will even offer those invested in their shares a portion of their profits in the form of cash – known as dividends. Dividend income can help Australians fund their lifestyles through retirement.  

Of course, how much income one might need to retire depends on a multitude of variants. If you’re unsure how much you might need, you can take a look at The Motley Fool Australia’s guide on retirement planning.

But if you’ve already crunched the numbers and found you need around $65,000 a year, here’s how big your ASX portfolio would need to be.

An ASX portfolio capable of providing $65,000 annually

The first figure to contemplate when investing for a set among of retirement income is your expected dividend yield. That’s the amount a company pays in dividends each year relative to its share price, expressed as a percentage.

Most S&P/ASX 200 Index (ASX: XJO) stocks offer a dividend yield of around 4% to 5%. Let’s assume one can realise the higher end of that range.

A portfolio would need to be worth $1.3 million to bring in $65,000 at a 5% yield.

However, plenty of shares offer more income than that.

For instance, Harvey Norman Holdings Ltd (ASX: HVN), Woodside Energy Group Ltd (ASX: WDS), and Fortescue Metals Group Limited (ASX: FMG) boast an average dividend yield of 9.7% between them right now.

At that rate, a portfolio of ASX shares would need to be worth around $670,000 to offer $65,000 of annual retirement income.

However, typically, higher dividend yields carry a greater risk of being cut than lower yields.

It’s also worth factoring in things like tax and inflation into your calculations when assessing your retirement income needs. Both things can quickly eat into your funds, potentially leaving you in sticky situations.

Starting from scratch

The prospect of investing such a wad of cash might sound intimidating. But there’s no need to invest it all in one go.

If one were to consistently invest a manageable amount in ASX growth shares each week, or compound their gains by reinvesting their dividends, their portfolio could grow to such a size in a matter of a few short years or decades.

Though, no investment is guaranteed to provide returns or downside protection.

The post How much would I need to invest in ASX shares for a retirement income of $65,000 per year? appeared first on The Motley Fool Australia.

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More reading

• It’s still rare to find a term deposit paying over 5%. Why not buy ASX dividend shares instead?
• Why the cash splash on potash could send the BHP share price higher
• ASX 200 mining shares in focus: Top broker says current iron ore price is ‘unsustainable’
• The top 10 ASX shares held by millionaires
• 5 things to watch on the ASX 200 on Friday

Motley Fool contributor Brooke Cooper has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Harvey Norman. The Motley Fool Australia has positions in and has recommended Harvey Norman and Wesfarmers. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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As most Australians would be aware, interest rates have been skyrocketing over the past 12 months or so. At the start of 2022, the cash rate was still stuck at the COVID-era record low of 0.1%. But the Reserve Bank of Australia (RBA) has raised rates 11 out of the past 12 times it has met for its monthly meetings (most recently this month).

As a result, the cash rate stands at a far higher 3.85% today. That means several things. For once, mortgages are now a heck of a lot more expensive than they were just 12 months ago.

But it also means the rate of return we are able to get from cash investments is also far higher. But even after these successive rate hikes, it is still difficult (although not impossible) to find a savings account or term deposit yielding above 5% per annum.

To illustrate, Commonwealth Bank of Australia (ASX: CBA)’s top term deposit rate is now sitting at 4% per annum. But to achieve that, you need to lock up at least $50,000 for 60 months.

Can you beat a 5% term deposit?

Now, many Australians, especially those who might have retired, will probably appreciate the capital protection and income certainty that a term deposit can provide. But I argue that most savers might be better parking their cash into ASX dividend shares instead.

Some ASX dividend shares offer better yields than 4% straight off the bat right now. For example, investing in the CBA share price will bag you a dividend yield of 4.27% on recent pricing. Already that’s beating the bank’s own term deposit rate (without the need to lock the cash away for five years).

Many ASX shares do even better than that. CBA’s banking stablemate Westpac Banking Corp (ASX: WBC) presently has a dividend yield of more than 6% on the table.

And a company like JB Hi-Fi Ltd (ASX: JBH) is offering more than 7.6%.

What’s better, all of these dividends come with full franking credits too. This can boost the real return from these dividends by an additional 43% or so. To illustrate, CBA’s dividend yield is 4.27%. But if we gross this yield up with CBA’s full franking credits, we get a grossed-up yield of 6.1%.

And we haven’t even got to the best bit yet. A term deposit offers no possibility of capital appreciation. You simply get your principal back at the end of the term, with your interest attached. But an ASX share can (and often does) grow in value over time.

ASX dividend shares can offer both growth and income

If a company expands its profits, it will have even more cash in the bank the following year that it can use to increase its dividend. The best companies can consistently become ever more profitable, gifting their loyal investors with an ever-rising share price, matched with an ever-rising dividend.

Just look at the Washington H. Soul Pattinson and Co Ltd (ASX: SOL) share price over the past decade below if you want proof:

Yep, Soul Patts shares have more than doubled in value over the past decade, thanks to capital growth. But this company has also increased its annual dividend every single year over this period too. Soul Patts funded 44 cents per share in dividends in 2012. But by 2022, this had risen to 72 cents.

Term deposits can be great if you value capital preservation and certainty above all else. But if you want the best bang for your bucks, then a good ASX dividend-paying share wins every time.

The post It’s still rare to find a term deposit paying over 5%. Why not buy ASX dividend shares instead? appeared first on The Motley Fool Australia.

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More reading

• Snapped up $5,000 worth of Westpac shares on the June dip? Here’s the passive income you’re earning now
• The top 10 ASX shares held by millionaires
• These ASX 200 dividend stocks are highly rated for a reason
• 3 reasons the CBA share price is heading lower: Goldman Sachs
• Why Appen, CSR, Silver Lake, and Westpac shares are falling

Motley Fool contributor Sebastian Bowen has positions in Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has positions in and has recommended Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has recommended Jb Hi-Fi and Westpac Banking Corporation. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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I think it is safe to say that it has been a week to forget for Appen Ltd (ASX: APX) shares.

Since this time last week, the artificial intelligence data services company’s shares have fallen over 28%.

This means that Appen shares are now down 65% over the last 12 months.

And just when you thought it was safe to go back into the water, one leading broker is warning investors that there could still be even more declines to come.

Appen shares tipped to sink and sink some more

According to a note out of Macquarie, its analysts have downgraded Appen’s shares and taken an axe to their valuation.

The note reveals that Macquarie has downgraded the struggling tech share to an underperform rating and cut its price target by more than half to a lowly $1.18.

Based on the current Appen share price of $2.21, this implies potential downside of almost 47% for investors over the next 12 months.

It also suggests that the whole of Appen is only worth in the region of $150 million. A far cry from its multi-billion dollar market capitalisation a few years ago.

Macquarie has concerns that its poor performance will continue for some time to come, putting pressure on its cash flow and balance sheet.

Thankfully, with the company having no debt, it sees a capital raising as a moderate risk. However, it certainly is possible given how things are going.

Elsewhere, analysts at Morgan Stanley are also feeling bearish. The broker has retained its underweight rating and cut its price target to $2.00.

Morgan Stanley appears concerned how Appen will be able to drive revenue growth while also cutting its costs markedly. All in all, the broker appears to believe investors should stay away until the company has proven its business model.

The post Macquarie forecasts Appen shares to crash a further 47% appeared first on The Motley Fool Australia.

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More reading

• Broker gives its verdict on the Appen share price crash
• Better ASX tech share to buy now that the Nasdaq bear market is over: Altium or Appen?
• Why Appen, Bank of Queensland, Kogan, and Mayne Pharma shares are dropping
• Here are the 3 most heavily traded ASX 200 shares on Wednesday
• Are Appen shares finally cheap enough to buy following today’s nosedive?

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Appen. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Diversification of earnings in the future could be a real boost for the BHP Group Ltd (ASX: BHP) share price with the expansion into potash.

BHP already has exposure to multiple commodities including iron, copper, nickel and coal.

But, in the next few years, BHP is planning to unlock another stream of earnings by growing into a different commodity sector – fertilisers.

What is potash?

The ASX mining share describes it as a “potassium-rich salt used mainly as fertiliser to improve the quality and yield of agricultural production.”

It said that potash fertilisers are a critical source of the potassium that crops need to grow. Potash strengthens the plants, helps them move water and sugar, and defends them against disease.

BHP also explained that potash and derivative chemicals are used in a variety of applications, including “glass manufacture, oil & gas drilling, aluminium recycling, water softening, fireworks and many more.”

What’s the appeal of potash?

More than 70% of global potassium chloride capacity is based on conventional underground mining which is the intended process for BHP’s Jansen potash project. Mining is what BHP does and it seems to be one of the best in the world with its long-term successes and low operating costs.

BHP thinks that potash demand could double by the late 2040s when it could be a US$50 billion market, partly thanks to the global population rising close to 10 billion by 2050.

The ASX mining share’s research suggests that there could be a rising calorific intake that involves more varied diets. BHP is projecting that food demand will increase by 50% and “sustainable increases in crop yields will be crucial if we are to continue to feed the world.”

BHP pointed out that in many parts of the world, “potassium is being removed from the soil faster than it is being replenished.” This suggests there’s an essential global need for potash.

The company has said that potash could see reliable base demand with “attractive long-term fundamentals and differentiated demand drivers.” It noted that the potash price doesn’t have much correlation to the iron ore price, which could smooth BHP’s earnings through economic cycles.

Potash reportedly has lower emissions than other types of fertiliser, so it’s “positively leveraged” to decarbonisation.

How could Jansen help the BHP share price?

The ASX mining share reminded investors in its most recent quarterly update for the three months to 31 March 2023 that it has approved US$5.7 billion of capital expenditure for stage one of Jansen, with an initial production target date for the end of 2026.

The goal is to have the capacity to produce 4.35 million tonnes of potash per annum, while the feasibility study for Jansen stage two continues to progress and is reportedly on track to be completed during FY24.

The Jansen project could have a 100-year life, meaning it could generate earnings for the long term for the business.

BHP has said that Jansen will use less equipment, have a larger capacity, have lower costs and be more automated than other potash mines. This is expected to mean that Jansen is one of the lowest-cost potash producers in the world when it’s completed.

In August 2021, BHP suggest that Jansen could earn an internal rate of return (IRR) of 12% to 14%, with an expected payback period of “seven years from first production”. It also suggested that the underlying earnings before interest, tax, depreciation and amortisation (EBITDA) margin could be approximately 70% because of its expected cost position.

If the ASX mining share can achieve those numbers, then potash could be very useful for the BHP share price as a way to diversify, defend and grow the profit.

The post Why the cash splash on potash could send the BHP share price higher appeared first on The Motley Fool Australia.

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More reading

• ASX 200 mining shares in focus: Top broker says current iron ore price is ‘unsustainable’
• The top 10 ASX shares held by millionaires
• What’s the forecast for the Fortescue share price this month?
• Analysts name 4 key reasons to buy BHP shares
• Can copper be the next big boost for the BHP share price?

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Electric vehicle maker Tesla Inc (NASDAQ: TSLA) sent a shiver down the spine of rare earths miners around the globe earlier this year.

The US company declared that it would shift its battery technology to no longer use rare earth minerals, to free itself from future supply shortages.

So how realistic is this? 

Is it just another impulsive thought bubble from mercurial chief Elon Musk, or can it actually happen?

Tyndall Asset Management portfolio manager Jason Kim set about to answer this dilemma, and named the ASX rare earths stock that he would buy right now:

What are the options for Tesla if they move away from rare earths?

The fact that many people don’t realise is that earlier model Teslas didn’t use rare earth minerals.

“Tesla had previously used AC induction motors (with no rare earths) in their earlier models but replaced them with permanent DC magnet motors which contained rare earths (NdFeB magnets),” said Kim on the Tyndall blog.

“Tesla’s decision to switch away from AC induction motors was driven by a range of factors, including problems with unbalanced voltage supply, rotor locking, and interference with the complex network of sensors found in modern vehicles.”

Because of these problems with AC induction, Kim added that many experts can’t see the car maker returning to that technology. 

So how would Tesla move away from rare earths now?

According to Kim, the “only current feasible alternative” to rare earths magnets is ferrite magnets. 

These magnets are already used in EV motor designs from Japan’s Proterial and Germany’s Bayerische Motoren Werke AG (ETR: BMW).

But it comes at a cost.

“While ferrite powered motors can match the performance of NeFeB powered motors to some extent, this performance comes with a significant weight and efficiency penalty that has made the switch unattractive to date.”

If Tesla wants to make the switch, it has to accept trade-offs like lower driving range or a larger battery.

“Given the bigger batteries, as well as more copper required, some experts believe there is no material cost advantage to using ferrite powered motors to NdFeB powered motors.”

This is the ASX rare earths stock to buy 

So Kim’s verdict is that, despite Tesla puffing its chest out, it will not be able to easily transition out of using rare earths.

“It appears the demand for rare earths will continue to grow and that supply growth still remains an issue,” he said.

“There are some possible advancements that may result in true alternatives to rare earths in motors, such as manganese bismuth magnets.  However, they are all still in their development infancy, and their commercialisation, if they prove to work, is still several years away.”

So considering rare earths shares are safe for now, which one would he buy on the ASX at the moment?

It’s not the one you’re thinking of.

“Iluka Resources Limited (ASX: ILU), which is predominantly a mineral sands miner with a very large presence in titanium dioxide and zircon markets, has been a beneficiary of government support aimed at increasing the supply of critical minerals including rare earths,” said Kim.

“This support will assist in the acceleration of Iluka’s emerging, but potentially very large, rare earths mining and processing business.”

The Iluka share price has already risen 20% year to date, all while paying out a dividend yield of close to 4%.

Kim reckons the stock provides “a unique and undervalued opportunity”. 

“The market has not fully understood the potential upside from their rare earths opportunity, and the significance of the government support that this project has received.”

The post Why the ‘market hasn’t fully understood’ this ASX rare earths share with huge upside appeared first on The Motley Fool Australia.

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More reading

• The 3 best lithium and rare earths ASX shares to buy right now
• If I’d invested $10,000 in Tesla shares 5 years ago, guess how much I’d have today
• 5 things to watch on the ASX 200 on Tuesday
• Leading brokers name 3 ASX shares to buy today
• Here are the top 10 ASX 200 shares today  

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Tesla. The Motley Fool Australia has recommended Bayerische Motoren Werke Aktiengesellschaft. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Westpac Banking Corp (ASX: WBC) shares are ones to consider if you’re looking for reliable passive income.

The S&P/ASX 200 Index (ASX: XJO) bank stock has paid two annual fully franked dividends for many years. The one exception is the pandemic addled year of 2020 when the bank gave its interim dividend a miss.

The past year’s passive income payments will go some way towards repairing the bank’s share price slide.

After closing down 2.6% yesterday at $21.13 per share, the stock is down 13% over the past 12 months.

How much passive income did investors receive from Westpac shares?

Westpac shares delivered a final dividend of 64 cents per share on 20 December.

The board declared an interim dividend of 70 cents per share when the bank released its half-year results on Monday. With profits up 22% year on year to $4 billion, the board increased the interim dividend by 15% from the prior year.

The stock traded ex-dividend yesterday, which helps explain its underperformance on the day. A company’s share price often falls in line with its dividend on the day shares trade without the rights to that payout.

Stockholders can expect that interim dividend to hit their bank accounts on 27 June.

That means investors will receive a total of $1.34 in passive income from each Westpac share over the past 12 months.

That works out to a trailing yield of 6.4% for investors who bought in at the current share price.

Or just about $318 in passive income from a $5,000 investment.

What if you bought Westpac shares in June?

June was a tough month for most ASX 200 stocks.

Westpac shares were no exception.

The stock traded at a closing low of $19.19 on 17 June.

Brave or well-advised investors who snapped up shares on the day will be sitting on share price gains of 10%.

Perhaps even better, they’ll be earning significantly more passive income.

At that price, Westpac shares traded on a yield of 7%.

Meaning you’d already have netted a handy $349 and change from that $5,000 investment.

The post Snapped up $5,000 worth of Westpac shares on the June dip? Here’s the passive income you’re earning now appeared first on The Motley Fool Australia.

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More reading

• The top 10 ASX shares held by millionaires
• These ASX 200 dividend stocks are highly rated for a reason
• Why Appen, CSR, Silver Lake, and Westpac shares are falling
• Why is the Westpac share price sinking today?
• 5 things to watch on the ASX 200 on Thursday

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Westpac Banking Corporation. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Suncorp Group Ltd (ASX: SUN) shares could be a bit of a bargain right now.

That’s the view of analysts at Goldman Sachs, which are tipping meaningful upside for the insurance giant’s shares over the next 12 months.

What is Goldman saying about Suncorp shares?

According to a note this week, Goldman Sachs has retained its buy rating with a modestly improved price target of $14.53.

Based on the latest Suncorp share price of $12.38, this implies potential upside of over 17% for investors over the next 12 months.

But the returns won’t stop there! Goldman is also forecasting fully franked dividend yields of approximately 6.4% in both FY 2023 and FY 2024. This boosts the total 12-month potential return to almost 24%.

Why is the broker positive?

The broker explains that it is bullish on Suncorp shares due to the tailwinds the company is experiencing right now. It said:

We are favourably disposed to Suncorp, noting in large part the tailwinds that exist in the general insurance market – i.e., very strong renewal premium rate increases and the benefit of higher investment yields. We think the strong rate momentum that SUN is getting should likely offset volume pressures as they optimise their risk exposures in certain portfolios such as home but also likely policy lapses / buy downs.

Goldman then adds:

We think that while SUN’s underlying margin is likely to face pressure into FY24 from higher reinsurance costs again, increased perils allowances, AMA contract renegotiation and possibly lower reserve release assumptions, we note that SUN is putting through significant price increases to reflect these pressures with the benefits flowing through with a lag. Further, we note that we could start to see more meaningful benefits from underlying claims inflation abating into FY24E. Separate to our thesis, we also see possible catalysts on the horizon for SUN including capital return post the bank sale and the possibility of a whole of account quota share arrangement similar to IAG. We are Buy-rated on SUN.

The post Why Goldman Sachs is bullish on Suncorp shares appeared first on The Motley Fool Australia.

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More reading

• Invested $9,000 in Suncorp shares in 2018? Here’s how much dividend income you’ve realised
• Brokers say these ASX dividend shares are top buys

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The QBE Insurance Group Ltd (ASX: QBE) share price will be one to watch on Friday.

That’s because the insurance giant has just released its first-quarter update.

QBE share price on watch following Q1 update

All eyes will be on the QBE share price this morning after the company revealed that it has started FY 2023 positively.

According to the release, the company recorded an 11% increase in gross written premiums for the three months.

This would have been even stronger had it not been for currency headwinds. On a constant currency basis, QBE delivered gross written premium growth of 14% over the prior corresponding period.

Management advised that group-wide renewal rate increases averaged 10% for the period, supported by a re-acceleration across property classes, and higher rate increases for QBE Re.

Ex-rate growth of 9%, or 5% excluding Crop, exceeded expectations despite the impact of planned program terminations in North America, and a reduction in growth across certain Financial lines segments.

Positively, organic growth in Crop continued, and management currently estimates that Crop gross written premium will be ~US$4.0 billion in FY 2023, with a net earned premium of ~US$1.4 billion.

One negative is that catastrophe activity has remained elevated through the beginning of 2023. This is underscored by Cyclone Gabrielle and the North Island flooding events in New Zealand, alongside a series of storms in North America and Australia.

As of the end of April, the net cost of catastrophe claims is ~US$480 million, which compares to QBE’s catastrophe allowance of US$535 million for the half. It’s going to be tight!

Investment performance

Something that could support the QBE share price today is the company’s investment performance. QBE delivered a strong investment result for the quarter, underpinned by supportive interest rates.

The first-quarter exit core fixed income running yield improved to 4.2%. This is up from the FY 2022 exit running yield of 4.1%.

Outlook

A final thing that could boost the QBE share price today is the company’s outlook.

Management revealed that its strong start to the year for premium growth, alongside its expectation that premium rate increases will remain supportive, means that it now expects FY 2023 group constant currency gross written premium growth of ~10%. This is up from its previous guidance for mid-to-high single digits growth.

In addition, it also revealed that it expects its group combined operating ratio to come in at ~94.5%. In case you’re not familiar with this metric, anything below 100% means an underwriting profit.

The post QBE share price on watch following strong Q1 update appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Have you invested in Pilbara Minerals Ltd (ASX: PLS) shares? You might have a hold in the market’s least risky ASX lithium companies.

That is, according to Shaw and Partners portfolio manager James Gerrish, who recently made such comments to Market Matters. The expert dubbed the S&P/ASX 200 Index (ASX: XJO) stock the “lower-risk exposure in a risky sector”, my Fool colleague Tony recently reported.

What might that mean for Pilbara Minerals shares and ASX lithium fans alike? Let’s take a look.

Are Pilbara Minerals shares a lower-risk ASX lithium buy?

Pilbara Minerals is one of the market’s largest lithium stocks. Indeed, it’s currently the ASX’s largest lithium pure-play.

Though, that might not be the case for long – Allkem Ltd (ASX: AKE) announced its plan to create a $15.7 billion lithium giant by merging with Livent Corp (NYSE: LTHM) this week. Pilbara Minerals’ $13.6 billion market capitalisation would be dwarfed by the unified entity.

However, unlike Allkem, Pilbara Minerals is a dividend-paying stock. It declared its maiden dividend earlier this year, offering investors 11 cents per share for the first half of financial year 2023.

And that’s partly why Gerrish likes the look of Pilbara Minerals shares. Looking forward, he forecasts the company to lift its production and, in turn, its earnings and dividends.

Pilbara Minerals recently pulled the trigger on bolstering its Pilgangoora Project’s nameplate production capacity to around one million tonnes of spodumene concentrate per annum.

The expansion will be funded through the company’s strong balance sheet and ongoing cash flows. It boasted a $2.45 billion net cash position as of 31 March.  

However, as Gerrish noted, the lithium space is generally inherently risky. Getting a lithium mine off the ground can take years, and many lithium hopefuls are still working to get there.

Unlike many of Pilbara Minerals’ peers, the company has achieved production. As have the likes of Mineral Resources Ltd (ASX: MIN) and Allkem.

Still, it’s worth noting most, if not all, lithium companies face a common risk factor: lithium prices.

What might the future hold for the ASX 200 lithium stock?

Morgans believes falling lithium prices will see Pilbara Minerals post a 4 cent per share final dividend.

Though it expects the value of the battery-making material to bounce in the future, my colleague James reports.

For that reason, the broker has a $5 price target on Pilbara Minerals shares. Macquarie is more bullish still, tipping the stock to soar to $7.70 – a potential 69% upside.

However, Goldman Sachs isn’t so hopeful. It has a neutral rating and a $4.10 price target on the ASX 200 lithium share – representing a 10% downside. The broker has long been bearish on lithium prices.

It’s also worth mentioning Morgans flagged it as a potential takeover target, alongside Allkem, last month.

Goldman Sachs, on the other hand, doesn’t expect any takeover talk regarding Pilbara Minerals shares any time soon. Nor is the company’s management focusing their efforts on merger and acquisition opportunities.

The post Are Pilbara Minerals shares a ‘lower-risk’ ASX lithium buy right now? appeared first on The Motley Fool Australia.

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More reading

• The top 10 ASX shares held by millionaires
• Here are the top 10 ASX 200 shares today
• Here are the 3 most heavily traded ASX 200 shares on Thursday
• ASX lithium shares rocket higher amid Allkem merger news
• What might the Allkem mega merger mean for Pilbara Minerals shares?

Motley Fool contributor Brooke Cooper has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Shareholders of S&P/ASX 200 Index (ASX: XJO) mining shares, beware. The iron ore price could be in for more trouble, according to one leading broker.

Some of the ASX 200’s biggest miners are involved in producing iron ore, such as BHP Group Ltd (ASX: BHP), Rio Tinto Ltd (ASX: RIO), Fortescue Metals Group Ltd (ASX: FMG), and Mineral Resources Ltd (ASX: MIN).

Any changes in the iron ore price can have an impact on their profitability. It costs roughly the same each month to extract one million tonnes of iron ore out of the ground, so any extra revenue the miners get for that production largely adds to net profit before tax (NPAT).

But it’s the same in reverse. When the iron ore price goes down, the fall in revenue largely wipes off the net profit.

So, it wouldn’t be good news for the ASX 200 mining shares if the iron ore price were to fall.

Iron ore price tipped to drop

The broker Citi has suggested the bounce back of the iron ore price above US$100 is likely to be “unsustainable”, according to reporting in The Australian.

Citi referred to China’s recent confirmation that steel output has been cut, though steel prices and steel mill margins have improved in the last week.

The Australian reported on the broker’s pessimistic commentary regarding iron ore prices:

Iron ore has been experiencing a relief rally due to the tailwinds of improved steel margins, following a sharp rebound in rebar and HRC prices, but we believe that this rally is unsustainable, as demand is likely to remain under pressure in the absence of any meaningful supply response.

We maintain our view that there is unlikely to be a quick turnaround in steel demand from the property sector, as new starts remained weak.

In the meantime, the latest PMI data suggest that the manufacturing sector has slipped into weakness akin to the construction sector.

Additionally, property sales appear to be losing steam since April, after the initial pent-up demand dries out.

Citi noted that in prior years, a rapid decline in the steel margin has led to a reduction in steel production, which then hurt iron ore demand. Steel mills have recently reduced their production, according to The Australian.

What next for the ASX 200 mining shares?

Time will tell whether the share prices of BHP, Fortescue, and Rio Tinto go higher or lower from here. The iron ore price has been unpredictable in the last few years. Certainly, the early-2023 rise of the commodity to more than US$120 per tonne may have surprised some investors.

Meantime, each ASX miner is pursuing a strategy of diversifying its operations. BHP just acquired copper miner OZ Minerals, Rio Tinto is working on the huge copper project Oyu Tolgoi in Mongolia, and Fortescue is trying to create a global portfolio of green hydrogen production facilities.

Until iron ore becomes a smaller slice of their earnings, the share prices of these three ASX 200 mining shares could be heavily influenced by falls (and rises) of the iron ore price. We can see on the chart below how each of them has dropped since 19 April 2023 amid the decline in the commodity price.

The post ASX 200 mining shares in focus: Top broker says current iron ore price is ‘unsustainable’ appeared first on The Motley Fool Australia.

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More reading

• The top 10 ASX shares held by millionaires
• Here are the top 10 ASX 200 shares today
• Here are the 3 most heavily traded ASX 200 shares on Thursday
• Flight Centre shares are trading around 52-week highs. Too late to buy?
• Why I think the NAB share price is a buy right now

Motley Fool contributor Tristan Harrison has positions in Fortescue Metals Group. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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