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Date : 21/02/2022

Mineral Resources

ASX :

MIN

Market Cap : $8.99 Billion

Dividend Per Share : $1.75

Dividend Yield : 3.69 %

Hold

52 Week Range : $35.80 - $66.88

Share Price : $47.36

Iron ore is recovering and supply chain issues are easing. We recommend a "Hold".

Company Analysis

Mineral Resources is one of the leading iron ore and lithium players in Australia. Mineral Resources, affected by lower iron ore prices in the December quarter, announced a decline in earnings and profitability – resulting in shares being sold-off.

The overreaction comes despite iron ore prices recovering from the depths of November 2021 to now trade around the US$145 a tonne range. Market participants anticipate a return in demand when construction projects resume and pick up the pace globally. Meanwhile, the Chinese industry ministry said that the country aims to increase domestic iron ore production and boost the use of steel scrap by 2025.

These positives have already transpired into the iron ore price, and this is why we believe that the reaction to MIN’s half-year result is an overreaction. When iron ore prices more than halved during the last two quarters, the expectation for exposed stocks was to see a temporary fall in profits. As iron ore prices have now recovered and are displaying an underlying positive momentum, the outlook is bullish.

Mineral Resources generated underlying EBITDA of $156 million, down 80% on the prior corresponding period (pcp). Earnings were negatively impacted by the collapse in iron ore prices and widening discounts. Underlying net loss after tax was $36 million, down 108% on pcp. Statutory NPAT was $20 million, down 96% on pcp.

In light of the Company’s capital investment programme, its underlying net loss after tax for 1H22 and volatile conditions in the iron ore market, the Board has decided not to declare an interim dividend.

Mining Services

It hasn’t been all doom and gloom for MIN. The mining services division revenue of $1,052 million was $267 million (34%) higher than pcp, and Mining Services EBITDA of $281 million was $46 million (20%) higher than pcp. 

Growth in the segment’s revenue and EBITDA was primarily driven by growth in the Utah Point Hub on pcp, along with new external contracts. Mining Services achieved a margin of 27%, up from 24% in 2H21 and in line with the overall FY21 margin.

Iron Ore

Mineral Resources operates two iron ore hubs: the Utah Point Hub and the Yilgarn Hub, both in Western Australia.

Iron Ore exports achieved in 1H22 of 9.9 million wet metric tonnes were 25% higher than pcp due to the growth in the Utah Point Hub. Production in the Yilgarn Hub is slightly lower on pcp, with the removal of high-cost tonnes from production in response to the drop in benchmark iron ore prices and widening discounts. Iron Ore revenue of $883 million was $336 million (28%) lower than pcp, with the growth in exports offset by lower iron ore prices.

In 1H22, the Platts Iron Ore 62% Fines Index (Platts) declined steeply from US$218 per dry metric tonne at the end of Jun-21 to a low of US$87 per dry metric tonne in the half-year and averaged US$137 per dry metric tonne for 1H22.

This was further compounded by discounts on 58% product grade widening. The Group’s average iron ore price achieved for 1H22 was US$71 per dry metric tonne, a decrease of 41% on the pcp.

Lithium

MIN operates the Mt Marion Lithium Project under a life-of-mine Mining Services contract. It is a joint project between MIN (50%) and one of the world’s largest lithium producers, Jiangxi Ganfeng Lithium (50%).

Mt Marion exports achieved in 1H22 of 207 thousand dry metric tonnes, in line with pcp. Mt Marion revenue of $143 million was $96 million (207%) higher than pcp. Mt Marion produced an EBITDA of $67 million for the Group, compared to $0 million pcp, reflecting a rebound in the lithium market. The achieved lithium spodumene price performed favourably, increasing 204% to an average of US$1,011 per dry metric tonne.

This brilliant performance has been offset by costs increasing by 60% on pcp, driven by significantly higher royalties in line with the higher lithium price, substantially higher shipping and haulage costs, and an increase in operating costs resulting from a reduction in yield as manning constraints and opening of a new mining area led to a portion of low-grade ore being processed.

These higher shipping costs and supply chain disruptions should ease as the effects of the Omicron wave subsides, and we return to normal operations once again.

The other lithium asset, MARBL JV, is an unincorporated joint venture between MIN (40%) and Albemarle Corporation (60%). MIN holds an interest in the Wodgina Lithium Project and two trains of the Kemerton Lithium Hydroxide Plant.

A restart of the Wodgina Lithium Project, located in the Pilbara, is underway, with the first spodumene production expected in Q1 of FY23. Initially, the MARBL JV will focus on restarting one of Wodgina’s three 250,000tpa processing trains. MARBL JV may restart the other two processing trains subject to market demand. Construction by Albemarle of the 50ktpa Kemerton Lithium Hydroxide Plant, near Bunbury in the South West, continued during the period. Mechanical completion of Train 1 was achieved in November.

Spodumene ore has been introduced into the plant as part of the commissioning process. Commercial production is expected in mid CY2022.

Outlook

Mineral Resources reaffirmed that they remain on target to meet FY22 volume guidance of a 15-20% increase for Mining Services, spodumene export guidance of 450-475 ktpa and the revised full-year iron ore export guidance of 18.5-19.5 mtpa.

As for the mining services segment, as mining production across Australia is not slowing down, we expect Mineral Resources to continue seeing growth in this segment. The commodities division, iron ore and lithium, is where the problem has been in this half-year update. However, we see a massive recovery coming. Iron ore prices are back up to highs not seen since September.

The supply chain issues in the lithium segment will gradually ease as Australia slowly and steadily puts the effects of the Omicron variant behind it.

Our detailed earlier report can be accessed by clicking here.

The Verdict

These recent results do not reflect the substantial progress that MIN has made across their iron ore, lithium, and gas businesses during the last six months, creating significant future value and underpinning the long-term growth for the Mining Services division.

We strongly believe that we have added the stock at the bottom of the iron ore plunge back in October at $43.37 a share. The management has a proven track record of hitting its objectives, one of which is the dividend payout that has consistently increased historically.

We have already seen a recovery in iron ore prices, and supply chain issues are gradually easing as the effects of Omicron are fading. We thus recommend investors to “Hold” positions.

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