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Date : 29/03/2021

Mineral Commodities Limited

ASX :

MRC

Market Cap : $123.18 Million

Buy

52 Week Range : $0.13 - $0.49

Share Price : $0.295

With an expanding global graphite market, we forecast MRC to continue growing. On the back of a consolidation, we recommend long-term investors to "Buy"

Company Analysis

Mineral Commodities Ltd. (ASX: MRC) is an Australia-based mineral resources company. The Company’s principal activities include mineral sands mining and processing at its Tormin Mineral Sands Project in the Western Cape Province of South Africa, undertaking procedures and evaluation for the development of the Xolobeni Mineral Sands Project in the Eastern Cape Province of South Africa and investigations into other mineral resources. Its segments include Mineral Sands mining and production (Tormin Mineral Sands project), Mineral Sands exploration (Xolobeni Mineral Sands project) and Corporate. In the Tormin Mineral Sands Project, the Company has mined approximately 1,624,636 tons of minerals consisting of garnet, ilmenite, rutile, and zircon. The Xolobeni Mineral Sands Project has a tenement area of approximately 2,900 hectares. The Company holds the prospecting rights in approximately four blocks in the Xolobeni Mineral Sands Project.

Source: MRC, Company’s Data

MRC exhibits solid financials with EPS expanding 9.9% per year, on track for massive growth

MRC’s earnings demonstrated a stable growth trajectory over a few years which we believe will eventually reflect on the company’s share price over the next few years. The EPS growth makes MRC an attractive quality company invest in. Over the last three years, Mineral Commodities has increased EPS by 9.9% per year, which is a tremendous rate of growth in line with the company’s emerging mineral market. MRC is growing revenues, and EBIT margins improved by 3.7 percentage points to 23%, over FY20. Furthermore, MRC has worked some fiscal magic during CY20 to post an annual EBITDA of US$ 21.3 million, up a solid 29% on the previous year despite only a modest uplift of 3% in total revenues which tapped out at US$ 63.5 million for the COVID-19 impacted year. Perhaps more importantly, the company pushed its annual NPAT up an impressive 72% to US$ 13.4 million during FY20. MRC held a healthy cash balance of US$ 5.6 million at year-end and generated over 90% of its FY20 revenues from its Tormin mineral sands project by extracting almost 2.4 million tonnes of heavy mineral-rich ore from its ground on South Africa’s west coast. The company also spent much of FY20 updating and adding to its total mineral resource across its various mineral sands deposits which make up the profitable Tormin project. At the current annual production rate from Tormin, the new resource numbers look to be capable of providing an ever-increasing source of cash for Mineral Commodities. In just its first year since acquiring the property, the company also produced approximately 18,000 tonnes of graphite ore from its Skaland graphite project in Norway. Recently, the company has been focused on building its exploration footprint around the Skaland mining operation. While MRC tabled a maiden resource at Skaland of 1.78 Metric Tonnes (Mt) grading 22% total graphitic carbon, the company also signed a landowner agreement over the Bukken graphite prospect. Bukken is the largest known graphite anomaly in Norway and sits 20 Km from its Skaland operations centre. The company has now built a solid resource base across its Norwegian and Australian graphite projects with the group’s total mineral resource reaching 9.75 Mt at 14% total graphitic carbon for 1.36 Mt of contained graphite, with over 40% of the resource already booked in the ore reserve category. After tabling a robust definitive feasibility study for its Munglinup graphite project in Western Australia during FY19, MRC is moving closer to achieving its ambition of supplying natural graphite concentrate on the growing battery anode market. The company has recently completed a pre-feasibility study on the potential to produce an active anode material product from its graphite concentrate, with the potential to place a plant at Skaland initially, then expand the processing options into its Munglinup project. MRC demonstrates its operational capabilities throughout FY20 and remains well on track to build a global graphite mining and processing business to grow along and support the boom of the international battery market.

Company Updates


Source: Tradingview.com

MRC unlocks significant value out of its mining assets during FY20

FY20 half-year has proved for MRC in unlocking the substantial value of its Tormin, Skaland and Munglinup mining assets. The Company continues to demonstrate its commitment to environmental sustainability a key factor of development to support the growing market of green energy. The recent acquisition of Skaland and its ongoing operations at Tormin will see it as one of the few future global mining companies running on complete renewable wind and hydropower electrical generation via its operations when the connection to the Siri wind farm near Tormin is completed. Furthermore, FY20 saw MRC’s granted approval to expand the company’s footprint of mining at Tormin which allow access to the adjoining high-grade area. This significant turning for the company provides access to two very exciting mining areas that are pivotal to the growth of the Company and reveal the huge potential of this unique Mineral Sands precinct. Access to the Northern Beaches has doubled the Company’s placer beach mining area, allowing the Company to properly optimise and manage the ongoing replenishment rate of the existing Tormin and Northern Beaches resources. The Inland Strand offers significant long-term high-grade mineralisation. Throughout FY21, MRC expects to shift its mining and processing operations to include the higher-grade Northern Beaches with the recently released JORC resource of 2.5 million tonnes at 23.5% Total Heavy Minerals.

MRC to become a key supplier for the global graphite market outside of China

MRC continued during 1HFY20 its integration and turnaround of the Skaland Graphite Operation. A key initiative was to lift the safety performance and implementation of appropriate systems and procedures in line with the group operating standards. The Company continued to mobilise further technical personnel including the appointment of a new General Manager and Mining Superintendent with international experience in underground mining. The company considerably invested in new equipment and operational improvements in mining, and processing engineering studies started to optimise the upgrading of total graphitic carbon fines production, as well as recovering higher-grade coarse flake product, which are precursors to the Company’s downstream anode business development strategy.

Furthermore, the company has announced during late Q1-2020 the maiden JORC resource at Skaland Graphite operation for the underground Traelen Graphite Mine which is estimated at 1.78 million tonnes at 22% total graphite content in indicated and inferred categories for 397 kt of contained graphite at a 10% cut-off. This JORC 2012 compliant resource is the foundation of the company’s plans to build on its existing graphite concentrate business and supports the company’s strategy to become Europe’s first vertically integrated producer of natural graphite anode material.

MRC released the Munglinup Graphite project definitive feasibility study in early Q1-2020 demonstrating robust economic outcomes of a concentrate-only production scenario, which we believe Munglinup will become a crucial asset in the company’s overall strategy to manufacture and supply natural graphite battery anode material to meet the fast-growing demand in the lithium-ion battery sector. Moreover, MRC has advanced its anode purification research and development and the recent progress in FY20 forms the foundation of the company’s intentions to become one of the largest natural graphite anode producers in Norway and Europe. All in all, we believe that the integrated future development of Munglinup will establish the Company as a key supplier of natural graphite anode outside of China.

Industry Analysis

The global graphite market is predicted to see a 7.4% CAGR between FY20 and FY30 to reach US$ 36,889 million in 2030 from US$ 19,093 million in FY19. The tremendous growth in the graphite market is the result of the increasing demand for lithium-ion batteries, which is itself a result of the rising sales of electric vehicles (EV).

Due to the increasing awareness regarding carbon emissions and the depleting fossil fuel reserves, governments around the world are providing their support for the EV market. The rising demand for Li-ion batteries is boosting the graphite market because the anode of such energy storage devices is made of graphite. Compared to lithium, such batteries need up to 20 times more graphite, as more graphite means the availability of more current to flow between the two terminals. Li-ion batteries for hybrid electric vehicles require 10 kg, while for a battery electric vehicle (BEV), 70 kg of graphite is required. Due to the slowdown of automotive production and construction activities, the graphite market has witnessed a decline throughout FY20 due to the COVID-19 pandemic. The electrodes category is likely to continue to lead the graphite market during FY21 and beyond. Electrodes made of graphite find widespread usage in arc furnaces in the iron and steel industry. Scrap from discarded appliances and automobiles is melted in these furnaces to recover crude steel. Graphite electrodes can easily withstand high temperatures and offer better electrical conductivity, which is why their usage in arc furnaces is rising. Looking forward to the next 10-year period, the highest value CAGR in the graphite market, of 7.9%, will be experienced by the automotive industry. Due to the high amounts of greenhouse gases being released into the atmosphere by gasoline, gas, and diesel automobiles, the popularity of EVs is rocketing, driving the demand for Li-ion batteries, which are rapidly replacing sealed lead-acid batteries as the primary source of power. With the high demand for graphite in Li-ion battery anodes, the consumption of this carbon allotrope in the automotive industry will grow rapidly. The Asia-Pacific region generates the highest revenue in the graphite market as of FY21, and the future scenario will likely be unchanged.

Source: MRC, Company’s Data

Investment Thesis

FY20 Financial Summary

For the fiscal year-end of December 31, 2020, Mineral Commodities revenues increased by 3% to US$ 63.5 million. Net income before extraordinary items increased by 81% to US$ 14.2 million. Revenues reflect other revenue increases by 67% to US$ 3.8 million, while sales of the product increased by less than 1% to US$ 59.8 million. Net income benefited from Share-based payment expenses decreased by 42% to US$ 152K (expense), FV Adjustments of Financial Investment increased by 2% to US$ 264K (income).

MRC exhibits solid performance despite the challenging economic environment

The group reported for 1HFY20, EBITDA of US$ 9.4 million, down -14% year-over-year from FY19 to US$ 10.9 million. Net profit before income tax decreases as well by -20% during the half-year of FY20, down to US$ 6.8 million compared to FY19 half-year NPBT result of US$ 8.5 million. These decreases in the EBITDA and NPBT results, in comparison to the prior half-year, indicate the decline of bulk ilmenite sales due to the global impact of the COVID-19 pandemic on customers. Lower ilmenite sales for the half-year have also resulted in lower transport costs, which are down from US$ 5.6 million in the prior half-year to US$ 0.6 million in 1HFY20. MRC reported an NPAT of US$ 5.6 million for 1HFY20 compared to US$ 7 million in 1HFY19, a -20% decrease year-over-year. During the first half of FY20, the Company had its cash of US$ 5.7 million decreased from US$ 8.1 million From the previous period. MRC’s cash position has been materially impacted by deferred bulk ilmenite sales due to the global impact of the COVID-19 pandemic and unpaid bulk garnet sales due to the ongoing dispute with GMA Group. On the other hand, the net assets have increased from US$ 46 million in FY19 to US$47.1 million. The increase in reported net assets reflects the continued profitability of the business during 1HFY20.

As for many organisations around the world, MRC financial and operational performance was impacted by the challenging economic environment induced by COVID-19. However, looking at the big picture, the company has shown constant solid result which gives us confidence in the business to become a key player in the supply of raw material for the development of battery to support the emerging market of electric vehicles. The Return on Equity has been negatively affected during FY20 and is likely to remain in the negative territory throughout FY21. However, we believe, MRC will witness incredible growth looking forward to FY22 and beyond as attested by the company continuous revenue growth.

Tormin Mineral sales

Product sales revenue at Tormin for the half-year of FY20 was US$ 12.3 million for a total of 110,467 wet metric tonnes sold, below the prior half-year’s revenue of US$ 29.7 million for 221,037 wet metric tonnes sold. The lower sales revenue reflects deferral of ilmenite bulk shipments because of the COVID-19 pandemic. Also, the lower non-magnetic concentrate sales during the half-year reflect lower production due to a decline in mining grade. The 106,575 tonnes delivered to garnet stockpiles to meet the minimum contracted quantity of 210,000 tpa under the company’s Life of Mine Garnet Offtake Agreement with GMA Group has not been paid for to date due to disputes with GMA Group. The relevant sales revenue amount of US$ 9.2 million owing by GMA Group is included in receivables as of June 30, 2020.

Source: MRC, Company’s Data

Skaland Graphite sales

For FY20 half-year, graphite concentrate sales of 6,511 tonnes were well above the historical performance of the company as MRC seek out to reduce the significant inventory acquired, partially offset by the impact of the COVID-19 pandemic on customers. Optimisation initiatives to increase the proportion of coarse flake in concentrate and improve the grade of the finer fractions in concentrate have had a substantive effect in increasing the coarse/medium fraction to 43% in Q2-2020, compared to 38% in Q1-2020. MRC reported US$3.6 million in sales revenue for the half-year of FY20 for a total of 6,511 tonnes sold.

Source: MRC, Company’s Data

Technical Analysis

Trend

Despite MRC traded in a range under the key multi-year level of A$ 30 cents per share for more than 20 years, MRC for the last three years exhibits a long-term bullish price action. The stock has challenged recently in 2018 and in early 2020 with the long-term resistance of A$ 30 cents which finally gave up to a rally in Q3-2020 to reach new highs not seen since 2000. However, the rally did not last, and MRC fell back from A$ 49 cents to its key level of A$ 30 cents per share, down -39%. Despite, the recent sell-off, MRC still presents a large amount of support underneath its market price of A$ 29.5 cents with a volume spike in June 2019 suggesting strong support at the 19 cents level combined with the multi-year ascending trend line which suggests MRC to likely remain above the A$ 25 cents per share in the medium-term.

Key price levels

MRC is currently revolving around the key multi-year level of A$ 30 cents per share which act as the near-term support level. The A$ 25 cents level may provide an additional support level in case MRC can not hold the A$ 30 cents ascending trend line. On the upside, the A$ 42.5 cents mid-term resistance may slow down the progression toward our target price of A$ 73 cents per share.

Volume and momentum

Volume surged since the last 200-day with the 20-day volume average up by 115%. The price action remains bullish in the near-term, evolving in a range between A$ 25 cents and 42.5 cents per share.

Trade consideration

  • Market participants might be interested to enter at a key support level: A$ 30 cents and A$ 25 cents.
  • Consider reducing exposure below A$ 22 cents
  • It is recommended exiting the trade below A$ 19 cents

Recommendation

We are issuing a “Buy” recommendation on MRC as we expect MRC to continue its multi-year upside progression. The upside is supported by the global graphite market which is expected to expand by 7.4% CAGR in the next 10-year period. The tremendous growth in the graphite market is the result of the increasing demand for lithium-ion batteries, which is itself a result of the rising sales of electric vehicles.

 

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