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Date : 09/09/2022

Mineral Resources

ASX :

MIN

Market Cap : $11.35 Billion

Dividend Per Share : $1.00

Dividend Yield : 1.58 %

Hold

52 Week Range : $36.950 - $68.500

Share Price : $62.96

MIN is an excellent bet combining the stability of an established business and long-term growth, although its shares are slightly overvalued. Therefore, we recommend our members a “hold” for now.

Company Analysis

Mineral Resources (ASX: MIN) share price reached $68.50, its all-time high recently on August 30, 2022. Since then, MIN pulled back by 12.5% to $59.94 per share following the release of the Company’s FY22 results. Market participants booked profits from the Company’s share price stunning 6-month upside of 25%. It has now regained momentum once again. Mineral Resources reported a net profit attributable to owners that tumbled 73% to $349.2 million in the fiscal year ended June 30 from $1.28 billion a year ago.

Despite the massive fall in the Company’s earnings during FY22, MIN’s share price remains steady near an all-time high, attesting to the market’s strong positive sentiment. The miner’s net profit took a hit from its higher operating and transport costs during FY22. Revenue fell by 9% to $3.42 billion from $3.73 billion year on year on lower realised iron prices offset by record production. Despite substantial impacts on earnings, Mineral Resources maintained its distribution with a final dividend of $1 per share, with a record date of September 5, payable on September 23, 2022.

mineral resources asx share price on tradingview
Source: TradingView

At the time of writing, MIN shares are changing hands for $62.96. The stock is up 12% year-to-date, outperforming the broad market. We provided our members two recommendations on Mineral Resources. We first initiated a “buy” recommendation in October last year, while the Company’s shares were priced at $43.37. Our second advice was to “hold” Mineral Resources as we continued to see the Company performing optimally despite the iron ore value near-term depreciation and the supply chain risk. Since our initial recommendation, Mineral Resources’ shares have appreciated by a lucrative 45%.

An innovative and leading mining services Company with a growing world-class portfolio of critical assets

Mineral Resources is an innovative and leading mining services Company with a growing world-class portfolio of mining operations across multiple commodities, including iron ore and lithium. It has evolved from a mining contracting services Company to also owning and operating its own commodity projects. Mineral Resources and its subsidiaries offer the full suite of pit-to-port mining and mining logistics services, including:

  • exploration,
  • planning,
  • mine design and construction,
  • construction and operation of minerals process facilities,
  • commodity transportation and
  • marketing services

A Company Well-structured For Growth

Mineral Resources owns well-established businesses in the niche mining services sector:

  • CSI Mining Services (CSI): CSI was established in 1994 as a crushing services Company. The entity has grown into a renowned provider of contract crushing, screening, processing and specialist mining services business within the resources sector. Over time, CSI’s service offering has expanded to build, own, and operate projects where Mineral Resources provides both the capital infrastructure and the operational expertise. CSI’s service offering also includes the design, manufacture, commissioning and ongoing on-site operation and maintenance of plant facilities, as well as the provision of specialised mine services such as materials handling, plant and equipment hire, plant and equipment maintenance, tails recovery, aggregate crushing, and mine design, engineering and construction.
  • Process Minerals International Pty Ltd (PMI): Mineral Resources also owns PMI, a dynamic and rapidly expanding mineral processor, producer and exporter. PMI is a specialist in establishing new mines and successfully implementing all stages necessary for initial production on behalf of tenement owners. PMI has wide-ranging expertise in mine establishment and ongoing management, including the processing, production, logistics, ship loading, marketing and export of commodities.
  • Energy Resources Ltd: The Energy Resources entity manages all Mineral Resources’ operations’ energy needs, allowing the Company to better manage its energy consumption and leverage energy efficiency initiatives across all Mineral Resources’ entities. The Energy team is focused on supporting MIN’s future business growth opportunities by striking the right energy mix via utilising gas, LNG and renewable energy solutions. Energy Resources owns assets in the Perth Basin with the potential to supply natural gas to fuel Mineral Resources’ sites and further reduce the Group’s carbon footprint and carbon intensity by decreasing the Company’s dependence on fossil fuels.
  • Mining Wear Parts (MWP): In April 2020, Mineral Resources completed the acquisition of the Mining Wear Parts business, which provides specialist parts to the mining, quarrying and recycling industries across Australia. MWP was established in 2016 and is based in Brisbane. MWP has expanded to become a leading and profitable national supplier of replacement parts used in crushing, milling, slurry pumps, mobile equipment and various consumable products such as castings. MWP is now a division of Mineral Resources’ CSI Mining Services business. This represents a potent edge for the Company, allowing it to further vertically integrate its supply chain.
Mineral Resources owns well-established businesses in the niche mining services sector
Source: MIN

 

Lithium Is Where MinRes’ Growth Lies

Mineral Resources is involved in strategic joint ventures, providing the Company exposure to lucrative Iron Ore, and Lithium Projects:

Mt Marion Lithium Project: Mineral Resources exclusively designed and built Mt Marion, its hard rock lithium asset in the Goldfields region of Western Australia. Between 2018 and 2019, the Company jointly owned Mt Marion lithium operation underwent an upgrade to increase its nameplate capacity of the plant to 450,000 tonnes per annum. While Mineral Resources increases its production capability, several key non-process infrastructure items have been developed. This includes installing long-term water security solutions, upgrading the main road intersection, expanding the LNG-fired power station and improving mine-site communications. A current upgrade project will increase production to 900,000 tonnes of mixed-grade spodumene concentrate annually by the end of this calendar year. The construction completion includes expanding the accommodation village, bulk explosives facility, and dry tailings load-out facility.

Marillana Iron Ore Project: During FY19, the Company entered into an agreement with Brockman Iron Pty Ltd, a subsidiary of Brockman Mining Ltd, for the Marillana Iron Ore Project in the Pilbara region. As part of the agreement, Mineral Resources accepted the farm-in obligations to earn a 50% interest in the Marillana Iron Ore Project. The Marillana Project is located in the Hamersley Iron Province within the Pilbara region, approximately 100 kilometres northwest of the township of Newman. Mineral Resources has progressed drilling and metallurgical test work at Marillana, in line with the farm-in and joint venture agreement with Brockman Iron Ore. Initial metallurgical tests indicate that the ore quality is in line with expectations, with an evaluation of cost-effective transport of ore to port underway. After successfully completing the farm-in obligations, an iron ore facility with a production capacity of up to 25Mtpa will be developed.

MARBL Joint Venture: Wodgina Lithium is the world’s largest known hard-rock lithium deposit, with a forecast production life of more than 30 years. During FY20, Mineral Resources completed the construction of the three-train 750ktpa capacity spodumene concentrate beneficiation plant. In November 2019, MRL announced the completion of the sale of 60% of the Wodgina Lithium Project and the establishment of the MARBL Lithium Joint Venture with US-based Albemarle Corporation. When ownership was transferred to the MARBL Lithium Joint Venture, the decision was decided to place Wodgina in care and maintenance due to challenging global lithium market conditions and preserve the world-class orebody. In October 2021, the MARBL Lithium Joint Venture announced its decision to resume operations at the Wogina Lithium Project with the expected spodumene concentrate production onward the third quarter of 2022.

Company Updates

During the year, we have witnessed news of the Group continuing its strong safety performance across its business despite a significant step-up in project development activities and an 18% increase in employees.

Mineral Resources generated an impressive Underlying EBITDA of $1 billion, although earnings were down 46% on the PCP. Revenue was negatively impacted in the first half of FY22 by a steep decline in iron ore prices and a widening of discounts, stabilising in the year’s second half.

First earnings from the Mt Marion Lithium Project

Mineral Resources Limited delivered a strong second-half performance, with record lithium prices, first earnings from the conversion of Mt Marion spodumene concentrate into lithium hydroxide and record growth in the Mining Services division. Underlying earnings after tax were $400 million, down about 64% on the PCP. Mineral Resources reported a statutory net profit after tax of $351 million, down 72% on the PCP. The Group also experienced a shrink of its operating cash flow of $344 million due to an increase in working capital relating to the restart of Wodgina, the increase in lithium pricing causing receivables to increase, and first earnings from the conversion of the Company’s spodumene concentrate into lithium hydroxide.

Mineral Resources’ Mining Services has delivered record production volumes during FY22

During the year, the Company’s Mining Services continued to deliver outstanding results, with record production volumes of 274Mt, up 10%, and a 15% improved EBITDA of $533 million. The Mining Services business was awarded five new contracts and had three contracts renewed.

Despite challenging conditions in the iron ore market, including the sharpest fall in iron ore price in its history, Mineral Resources shipped a record 19.2 million tonnes in FY22. The outstanding operational performance came alongside significant progress with the Company’s game-changing Onslow Iron and South West Creek projects, transforming Mineral Resources’ iron ore business into a large, low-cost, high-quality producer.

Expansion of Mt Marion to a 900,000 tonnes per annum Lithium Project

Regarding its lithium business, Mineral Resources and the Company’s JV partner Ganfeng approved the next stage of expansion of Mt Marion to 900,000 tonnes of annual production. More importantly, we have also been very pleased about the Company’s maiden earnings from its lithium hydroxide production, a first for an ASX-listed company.

Spodumene concentrate production has resumed at Wodgina, one of the world’s largest hard-rock lithium mines, following the start-up of Trains 1 and 2. The Kemerton Lithium Hydroxide Plant, like Wodgina, is part of the Company’s MARBL JV with Albemarle and is in the final stages of pre-production activities. Mineral Resources and Albemarle continue to work on restructuring and expanding the MARBL JV to better align operational capabilities.

Mineral Resources Energy Business made a significant onshore gas discovery

During FY22, the Company’s energy business, Energy Resources, made a significant onshore gas discovery at Lockyer Deep in the Perth Basin. We are confident that this discovery will place Mineral Resources in a unique opportunity to secure its own energy supply, assist with the transition from diesel to lower-emission fuels and deliver potential export opportunities.

Investment Thesis

Mineral Resources continues to demonstrate strong capabilities in project execution and development

The Company continues to demonstrate solid project execution and development, positioning the Company safely and efficiently for growth. Throughout FY22, we have seen Mineral Resources make substantial progress in expanding its capacity in mining services and across its iron ore and lithium operations.

Key highlights during FY22 include:

  • No Lost Time Injuries and maintaining a low Total Recordable Injury Frequency Rate of 2.33
  • Record Mining Services production volumes – 274Mt
  • Expansion to double production at Mt Marion commenced
  • Wodgina Train 1 and 2 successfully restarted production
  • First lithium hydroxide earnings from Mt Marion offtake
  • Record iron ore tonnes sold – 19.2Mt
  • Onslow Iron project construction commenced
  • Secured capacity allocation for Stanley Point Berth 3 at Port Hedland subject to approvals
  • Binding port and rail sharing agreement with Hancock Prospecting Pty Ltd
  • Significant Perth Basin onshore gas discovery at Lockyer Deep

Mineral Resources generated an Underlying EBITDA of $1 billion for the 2022 financial year, 46% lower than FY21’s $1.9 billion. Earnings were tremendously affected in the first half by the steep decline in iron ore prices and widening discounts before stabilising in the second half.

With record lithium prices, first earnings from the conversion of Mt Marion spodumene concentrate into lithium hydroxide and record growth in the Mining Services division, Mineral Resources delivered a strong second-half performance.

Despite Mineral Resources facing strong headwinds during the period, the Company has not failed to deliver positive underlying earnings after tax of $400 million. MIN’s Statutory net profit after tax was $351 million, including $10 million in post-tax impairment charges in intangible assets.

According to the challenging trading environment, the Directors have resolved to not declare an interim dividend, which we think is reasonable given the circumstances. Although the Company will distribute a final dividend and total dividends for FY22 of $1 per ordinary share. The final dividend will be fully franked, have a record date of September 5, 2022, and be paid to shareholders on the 23rd of September 2022.

mineral resources fy22 operating cash flow
Source: MIN

 

Robust balance sheet geared toward growth with an ample cash position of $2.4 billion

During FY22, the Group maintained a strong balance sheet with cash and cash equivalents of $2.4 billion, compared to FY21’s cash position of $1.5 billion. Additionally, Mineral Resources has secured substantial undrawn debt facilities to support its business development activities of $425 million. The Group also completed a US$1.25 billion Senior Unsecured Notes offering, consisting of US$625 million with an 8% coupon due in 2027 and US$625 million with an 8.5% coupon due in 2030.

FY22 was a pivotal year for Mineral Resources to build its foundation for future growth. Accordingly, the Company has deployed its capital on the following key projects:

  • Early works and development of Onslow Iron
  • Restart and ramp up of Wodgina with the commencement of operations of Trains 1 and 2
  • Investment to support new external Mining Services contracts
  • Natural gas drilling programs in the Perth Basin as part of the transition to lower-emitting fuels and low-cost energy, with a significant gas discovery made at Lockyer Deep-1
  • Investment in a new state-of-the-art head office to support the Group’s growth agenda.

A record year for Mineral Resources’ Mining Services Business with a revenue of $2.1 billion

Mining Services delivered record revenue in FY22

Mineral Resources’ Mining Services delivered a record year with revenue of $2.1 billion, contributing to an EBITDA of $533 million. This reflects the Company’s record production of 274Mt for FY22. The revenue growth has been primarily driven by higher volumes at Utah Point Hub and new external contracts.

Mining resources production related contract tonnes
Source: MIN

 

Iron ore price decline offset by increased production

The Group owns two iron ore operations in Western Australia, the Utah Point Hub and Yilgarn Hub. Iron ore exports in FY22 were a record 19.2Mt, 11% higher than FY21, lifted by the growth at the Utah Point Hub. However, production in the Yilgarn Hub was slightly lower, with high-cost tonnes removed in response to the lower iron ore prices and widening discounts during the first half. Iron ore revenue was $2 billion for the year, while FY21’s revenue was $3.1 billion, a 35% decline year-on-year. Iron Ore earnings were mainly driven by volume growth offset by lower iron ore prices and widening discounts.

Iron Ore prices (Platts 62% IODEX) declined steeply from US$218/wmt at the end of FY21 to a low of US$87/wmt during the first half, before stabilising in the second half to average US$139/wmt across FY22. The Group’s FY22 average iron ore price was US$82/dmt, a decrease of 42% on FY21, including negative prior period finalisations of US$33 million. Excluding prior year adjustments, the Company’s iron ore shipments for FY22 achieved a price of US$84/dmt.

Lithium spodumene concentrate revenue grew by threefold

Mineral Resources sold 464k dmt of spodumene concentrate in FY22, 4% lower than FY21 due to lower yields at Mt Marion from mining lower-grade transitional material. However, we have been very pleased about the Spodumene concentrate revenue of $566 million, which was 336% higher than FY21’s $130 million, reflecting a significant rebound in lithium prices. The Group’s share of Mt Marion revenue for FY22 was $539 million compared to FY21’s $130 million. The achieved spodumene concentrate price at Mt Marion increased by 329% to an average of US$1,733/dmt. In response to strong lithium market conditions, the MARBL JV, in which the Group has a 40% interest, also sold 22k dmt of spodumene concentrate, which was stockpiled before Wodgina’s closure in 2019, for US$2,200/dmt. Spodumene concentrate EBITDA returned to profitability, bringing $382 million of earnings, compared to FY21’s loss of $5 million. Furthermore, the MARBL JV restarted operations at the Wodgina mine during the period. Mining operations ramped up steadily with the resumption of production from Train 1 completed by FY22 and Train 2 in July 2022. The spodumene concentrate produced from Wodgina will be converted into lithium hydroxide from FY23.

Lithium hydroxide: Mineral Resources tool control of its 51% offtake share of Mt Marion

The Group took possession and control of its 51% offtake share of Mt Marion spodumene concentrate from the 1st of February 2022, which was toll-converted into 6,722 tonnes of lithium hydroxide in China and sold under a tolling agreement with the joint venture partner, Jiangxi Ganfeng Lithium. The average achieved price on the sale of lithium hydroxide under the arrangement was US$77,052 per tonne. Mineral Resources recognised an EBITDA of US$154 million. The tolling agreement has been extended for an additional three months and will end in November unless further extended by both parties.

The MARBL JV also holds an interest in two Kemerton Lithium Hydroxide Plant trains near Bunbury in the South West region of Western Australia, which, once completed, will receive spodumene concentrate feed from the third-party Greenbushes lithium mine. Construction of the plant progressed during FY22, with the first product from Train 1 delivered in early July 2022 and mechanical completion of Train 2 on track for the first half of FY23.

No interim dividend for FY22 despite overall strong operational performance

mineral resources asx dividend distribution fy22

FY22 has been another strong year for the Company, with a positive financial performance and meeting of guidance across all its key metrics. Furthermore, we have seen Mineral Resources make material progress and success with several strategic initiatives starting in FY23, most of which are the result of many years of planning and development. We are confident that these strategic initiatives will enable the Company to continue its growth over the next decade. Despite the success delivered across many fronts, the Group did not declare an interim dividend due to market uncertainty and a substantial reduction in iron ore prices over the year’s first half. A wise decision, in our opinion. Although, a Final Dividend of $1 per share has been declared. A fully franked, at a record date of September 5, 2022, will be paid on the 23rd of September 2022.

FY23 Outlook: Strong growth potential built on FY22 solid foundations

Mineral Resources continues to focus on growing its mining services capability onward FY23. The Company will focus on operating crushing screening and processing plants and providing infrastructure solutions to the mining industry. We expect the mining services volumes to expand by 10% to 274 million wet metric tonnes while maintaining adequate margins. We think that the Mining Services business as a pillar of the Company will continue to bolster in FY23 with services provided for:

  • A full year of operations at Wodgina,
  • increased activities at Mt Marion, and
  • over the coming years, the launch of the Onslow Iron project.

Increase Iron Ore exports and ramp up of lithium production onward FY23

Iron Ore exports also increased to a record of 19.2 million wet metric tonnes, up 11% from FY21. The Yilgarn Hub shipped 8.7Mwmt, and Utah Point Hub shipped 10.5Mwmt, benefitting from the Group’s prior year’s investment in Wonmunna. These volumes will be bolstered in future with volumes from the Onslow Iron and South West Creek projects. The restart of operations at Wodgina commenced in the second quarter of FY22, with the first spodumene concentrate from Train 1 delivered in May and 22k dmt of spodumene concentrate produced in the quarter. The restart of Train 2 progressed well, with the first spodumene concentrate delivered in early July 2022. Commencing February 2022, Mineral Resources’ 51% share of offtake from Mt Marion spodumene concentrate was converted into 6,722t of lithium hydroxide in China under a tolling agreement with Ganfeng.

Mineral Resources is also progressing rapidly on the development of its Kemerton Lithium Hydroxide Plant during FY22, with Kemerton Train 1 commissioning occurring in July 2022 and Train 2 due for completion in the second quarter of FY23.

Mineral Resources exhibits excellent fundamentals, although its shares are a bit pricy at this time

mineral resources asx trend on tradingview
Source: TradingView

Mineral Resources shares (ASX: MIN) are currently trading in the $68.5 and $52 range. The Company’s fundamentals are excellent. However, we believe Mineral Resources stocks have reached their overbought territory driven by the strong optimism of the market. We have estimated Mineral Resources’ fair value to be priced at around $40 and $50 per share.

Three reasons why MIN has a strong long-term upside potential

We like the Company’s long 30 years track record of success and stability:

  1. Long-term Growth Potential: Mineral Resources has demonstrated steady assets growth at an impressive 30% per annum, reaching total assets of $7.8 billion.
  2. Reliable dividend: The Company has delivered solid long-term dividend growth of 20% per annum.
  3. Exposure to lithium: Mineral Resources intends to ramp up its lithium production to reach a target LiOH capacity of 118Ktpa over the next five years, contributing to potential massive earnings growth.

Our earlier report can be viewed by clicking here.

Recommendation

We like Mineral Resources’ 30 year fetrack record of success and reliability. This has been proved again during FY22, with another year of profitability and strong earnings despite difficult trading conditions. We are confident that Mineral Resources has the ideal foundation for further growth onward FY23, particularly with the recent implication of the Company in developing its lithium businesses. However, we believe its stocks are currently trading above their fair value, which we have estimated to be in the $40 – $50 bracket.

Overall, MIN is an excellent bet combining the stability of an established business and long-term growth, although its shares are slightly overvalued. Therefore, as of 9-Sep-2022, we recommend members to “Hold” for now.

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