It has been an exceptional ride since our first Buy recommendation of Mineral Resources (ASX: MIN) or Min Res at $43.37 per share in October last year. At the time of writing, MIN shares are changing hands for $88.99 (at the time of writing), which means a 100% upside for members. Min Res is a story of its iron ore assets, mining services, and, more recently, its lithium assets. As the markets started paying closer attention to the Company’s lithium assets, the share price began its ascendency.
The Company continues to exhibit a solid pipeline of ongoing Projects and opportunities, which could lead to further share price upside in the upcoming years. We are discussing all these in the report.
A long history of successful, continuous expansion of operations
Min Res has a very interesting history. It began as a two-person business, solely involved in crushing contracts, about 30 years ago. Over decades, the business has built a strong reputation for delivering one of the best-in-class services to the mining sector in Western Australia. Today, Mineral Resources has expanded quickly and is now listed among the ASX 50 Company, employing 5,000 people. The Group has now become a market leader as a mining services provider, servicing the world’s largest mining firms. Furthermore, Mineral Resources also expanded its activities towards growing its world-class portfolio of mining assets, with iron ore and, more recently, lithium operations.
What we like about Mineral Resources is the diversity of its operations and vertical integration. The Company is organised into four growth pillars, mining services, iron ore, lithium, and energy. Moreover, Mineral Resources has set a five-year strategy and objectives for substantial growth in each of its four business segments:
Mining Services: The Group intends to double its mining services capacity over the next five-year period. This will be achieved along with the Company’s strategy to build, acquire and operate a growing portfolio of world-class assets. As a vertically integrated Company, the increased mining operations will also support Mineral Resources leveraging its offer to its Tier 1 clients’ pit-to-port solutions.
Iron Ore: Mineral Resources has an ambitious objective to ramp up its production from 20Mtpa to a targeted 90Mtpa+ through developing its three high-quality iron ore assets in Ashburton, Pilbara, and Yilgarn.
Energy: Mineral Resources is investigating high-potential downstream opportunities, including LNG and iron ore pellet manufacturing. The Company also is well aware of the importance of developing sustainable energy for its operations. Thus, the Group is displacing its diesel with gas and solar across its operations.
Lithium: Lithium is where Mineral Resources’ growth truly lies. The Company is involved in strategic joint ventures, providing exposure to lucrative Lithium Projects. The Group aims to become a top-five hydroxide producer and create a significant cost advantage through a fully-integrated business model.
Mineral Resources’ lithium operations in the spotlight
FY22 was an excellent fiscal year for Mineral Resources operationally and for its share prices. And this positive momentum seems to not fade anytime soon. The stock achieved another all-time high on Wednesday, November 23, at $87.50 per share and has now marginally retraced back to the $82 level, still holding consistently its 200 daily moving average. MIN share price action clearly reflects the excitement of the market over the Company’s pipeline of Projects and opportunities. One of Mineral Resources’ major “attention drivers” received throughout FY22 was related to the acceleration of the Company’s lithium Projects development. We believe this segment of the business is relatively undervalued and can potentially bring substantial growth opportunities for Mineral Resources. The Company appears to give more importance to this critical battery metal and underwent the Group’s restructuring earlier this year to give lithium a separate business segment. This move led to the market anticipating a possible spinoff into a separate lithium entity. The rumour started following a report from the AFR on September 8, mentioning that Mineral Resources has appointed JP Morgan to help the Company leverage the value of its lithium division by spinning off its lithium business in the U.S.
However, Mineral Resources responded quickly to the speculation with an announcement the next day, stressing that at this stage, the Company does not plan for any lithium demerger but is looking at a few strategic options to maximise shareholders’ value.
FY23’s first-quarter results
Mineral Resources announced the Final Investment Decision to develop the Onslow Iron Ore Project and spodumene concentrate production on track to achieve FY23 Guidance
A slight decline in Iron Ore Shipment reported during the period
The Company published its Q1 activities in late October, reporting operations progressing as expected. We have seen a bit of a slowdown in Iron Ore shipments, marginally down by 3% quarter-on-quarter to 4.5 million wet-metric-tonnes (wmt), although Mineral Resources remains broadly in line with its FY23 Guidance of 17.2 million to 18.8 million wmt. Along with the slight decline in shipment, the Iron Ore price was also under pressure due to fears growing over the prospect of a Chinese slowdown during the period. For that reason, Mineral Resources saw its average realised Iron Ore price capped at US$ 72.77 per dry-metric-tonne (dmt), representing a 15% decrease over the previous quarter.
MIN confirmed its Final Investment Decision to develop the Red Hill Iron Ore JV at the Onslow Project
On the other hand, we have also seen some positive news, with Mineral Resources confirming its final investment decision to develop the Red Hill Iron Ore Joint Venture at the Onslow Project along with POSCO, AMCI, and the largest Chinese steelmaker, Baosteel. This Project, previously known as the Ashburton Hub Development, is an estimated $3 billion Project that will comprise a new mine, processing plant, airport, accommodation resorts, sealed 150 kilometres haul road, port, marine infrastructure and transhipping vessel fleet.
Mineral Resources expect to design a 30+ year Project with a capacity superior to a 30 Mtpa mining rate with an infrastructure supporting 35 Mtpa. The Project is progressing rapidly, with long lead-time capital equipment ordered for the mine, port and marine operations. The Company has also been accelerating mine development activities during the quarter, with construction commencing on the A320-capacity airport, truck maintenance facility, camp and port.
Moreover, good progress has been made in building the transhipping vessels, currently assembled at a COSCO yard in China. Four tugs have also been purchased, with the fifth agreed in principle pending contract. Besides, work at the mine began with infill drilling at Ken’s Bore and the Upper Cane deposits, achieving 300 reverse circulation (RC) holes for 14,868 metres and 29 diamond core holes for 1,348 metres drilled across the deposits.
With the development of this Joint Venture, Mineral Resources targets an initial production capacity of 35 million tonnes of Iron Ore annually during the Project’s first phase, with potential ramp-ups planned through the thirty years of expected mine life. Once in operation, the Joint Venture would be considered one of Western Australia’s largest Iron Ore developments and become Mineral Resources’ flagship Iron Ore Project. The Red Hill JV is an exceptional Project. It is a low-cost, long-life operation and exhibits excellent economics through commodity price cycles.
Furthermore, Mineral Resources will not only functions as the manager of the Joint Venture but will also earn an extra 17% interest in the Project via a loan agreement for the $1.3 billion funding of its capital expenditure.
Drilling continues at the Yilgarn Iron Ore Hub, and developments continue at the Marillana deposit, Pilbara
Mineral Resources continues to progress the drilling programme at the Koolyanobbing Magnetite Phase 1 during the period. The Company drilled a total of 17,315 metres of RC and 1,103 metres of diamond core. Phase 1 of the programme consists of 30,000 metres following the promising results from the proof-of-concept drilling programme undertaken in FY22. The Phase 1 programme’s objective is to identify and scope the resource potential of an initial mining area footprint.
The Company also continued its development activities in the Pilbara at the Marillana deposit during the quarter, starting a hydrogeology drilling programme. It also implemented a pilot plant geo-metallurgical test work on the 622 tonnes of ore collected through the ongoing bulk sampling drilling programme.
Mineral Resources prepares for drilling in the Perth Basin with possibly the restart of the Red Gully 10 TJ/day gas facility
Regarding gas Projects, during the quarter, the Company prepared and lodged the Discovery Assessment Report with the Department of Mines, Industry Regulation and Safety (DMIRS) after successfully achieving a well test programme earlier this year. Mineral Resources also submitted the Environmental Plans for the North Erregulla 1 (NED1), Lockyer 2 and Lockyer 3 wells, which were approved by the DMIRS.
Mineral Resources is now planning to start its six wells drilling campaign as soon as December. Although the drilling activities remain subject to rig agreement and regulatory approvals, which are being finalised. The Company will begin to drill first the NED1 and the Lockyer 2. Onward CY23, Mineral Resources will proceed to the other wells, Lockyer 3, Lockyer 4, and two other exploration wells within the Company’s acreage in the Perth Basin. It is estimated that the drilling and mobilisation for each well will take about 60 days.
During the quarter, Mineral Resources reviewed the Romanesque 3D seismic survey, which revealed valuable information about the Company’s permits EP440, EP389 and Production Licences L18 and L19. The survey unveiled several viable drilling targets. If these targets emerge as successful, Mineral Resources could potentially consider restarting the Red Gully 10 TJ/day gas facility.
Completion of the Joint Venture registration with Buru Energy for the Onslow permit EP510 for the gas Project in the Carnarvon Basin
The Company completed the Joint Venture registration process with the regulator for the Onslow permit EP510 in the Carnarvon Basin. Mineral Resources will act as the operator with 75% ownership of the Project, whilst its partner Buru Energy Limited (ASX: BRU) will own 25%. Work has already started on-site with an ongoing carbon capture and storage feasibility programme. The Company is planning two wells on this acreage in FY24.
Ongoing work to ramp up lithium production at the Mt Marion and Wodgina Project
Mineral Resources undertook drilling and exploration at its Mt Marion flagship Project throughout the quarter for 692 metres of diamond core as part of the metallurgical test work. The objective is to study and optimise product yield through the processing plant. Moreover, 6,585 metres of near-mine exploration RC drilling was also completed. Out of Mt Marion, the Company delivered 56,000 dry-metric-tonnes, 51% shared shipments of spodumene at an average realised price of US$2,364, including discounts and grade adjustments. Mineral Resources realised lower shipments than in the second quarter. This was due to the Company facing a few operational bottlenecks, such as mining lower-grade transitional ore and plant shutdowns. On a positive note, Mineral Resources’ Wodgina Project allowed the Company to offset Mt Marion’s lower output, as its production is ramping up, with the first cargo in July. The Wodgina Project delivered 36,000 dry-metric tonnes, 40% shared shipment for the quarter.
Overall, Mt Marion and Wodgina lithium Projects remain on track and well-positioned to achieve the FY23 production Guidance set at 490,000 to 540,000 dry metric tonnes. Moreover, Mineral Resources saw 4,703 tonnes of lithium hydroxide converted in the first quarter, which is being sold on or processed by partners Jiangxi Ganfeng Lithium and Albemarle.
In the last ten years of operations, Mineral Resources has not failed a single year to produce revenue, which grew at an impressive CAGR of 13.45% from FY13 to FY22. But most importantly, in the last five years, the Company has achieved a consistent Gross Profit Margin, which averaged 87.6%. This has even improved further in the last twelve months, with a gross profit margin approaching 91%. These figures showed us how Mineral Resources is a reliable business with stable operations, and this top-line growth should continue to pay off for shareholders in the long run.
1. A founder-led business with decades of successful operations
Chris Ellison founded each of the three original subsidiary companies of Mineral Resources, the crushing business, and Process Minerals International Pty Ltd. He has over 36 years of experience in the mining contracting, engineering and resource processing industries. Thus, he has helped the Company successfully navigate many financial crises and commodity and economic cycles. Chris Ellison is still very involved in the business, acting as the Managing Director.
At Shares In Value, we like founder-led businesses. We believe these companies take better decisions and are more likely to achieve consistent operational performance in the long run. This view is confirmed by many studies. According to the Harvard Business Review, among the S&P 500 companies, businesses where the founder is still involved tend to be more innovative, generating 31% more valuable patents and are more likely to take bold investment decisions to revive and adapt their business. The “owner’s mindset” is critical to a company’s success, and Mineral Resources continues to retain this trait, as we have seen recently with its venture into the hyper-growth lithium sector.
As they age, businesses that retain the “owner’s mentality” are four to five times more likely to reach the top-quartile performers, according to studies. It has been proven that companies with the founder still deeply involved performed 3.1 times better than the rest over the past 15 years.
Chris Ellison still owns the largest portion of Mineral Resources, with almost 12% of its shares. Moreover, it is interesting to see that almost half of the Company’s shareholders own the business, with the majority of these top shareholders being institutional investors holding 38.5%, followed by individual investors such as insiders with 12.6% and a few private companies with a bit more than 2%.
In the last six months, we have seen an increase in trading volume, particularly from institutional investors, such as State Street Global Advisors and BlackRock, Inc. In the last two reporting dates, BlackRock has increased its exposure to Mineral Resources by 21.79%. Other financial institutions also topped up on their shareholding in the Company, with Mccusker Holdings Pty. Ltd., which notably saw its position grow by more than 300%, Netwealth Investments Ltd, and CPU Share Plans Pty Limited, up 28.99% and 14.65%, respectively.
2. Mineral Resources lays the groundwork for transformational growth
FY22 was operationally a great year for the Company. Hence, we have seen Mineral Resources laying the groundwork for further growth opportunities. We believe the Company now has solid foundations for transformational growth. Despite challenging market conditions, Mineral Resources has been able to keep delivering strong operational performance, as reflected by its Earnings Per Share (EPS), which averaged $1.66 in the last twelve months, well above its five years median EPS of $1.35.
The material and mining sector has faced tremendous volatility in the last two years. Mineral Resources experienced a tough first half in FY22 due to plunging Iron Ore prices, which contributed to widening discounts and cost pressures across the supply chain. In response to that situation, Mineral Resources rapidly decided to turn off its “high-cost tonnes” at its Yilgarn Hub to minimise capital expenditure. The trading environment improved in the second half of FY22, which led to a record Iron Ore export of 19.2 million tonnes. The strong performance allowed the Company to declare a final fully franked dividend of $1 per share, bringing the annual yield to 3.34%.
Relevant foundations to support its long-term business transformation
The Mineral Resources’ balance sheet still holds a relatively large amount of cash and equivalents. The Company is very diligent when it comes to its capital structure mix. Thus, in the last twelve months, Mineral Resources’ total debt to total capital ratio has virtually remained unchanged from its five years median total debt to total capital of 16.7%.
This fiscal year, Mineral Resources intends to accelerate its transformation towards becoming a leading provider of innovative and sustainable mining services. The Company expects its vision to materialise over the next five years. To achieve its objective, Mineral Resources plans to invest substantially in developing corporate governance, structures, systems, and leadership capability. We believe the Company has the financial and operational foundations to achieve its goal.
On the way to becoming one of the world’s top 5 lithium hydroxide producer
The transformation process already started with Mineral Resources striving to position itself as a global leader in lithium mining, processing and global distribution. Thus, the Company recently restarted its operations at Wodgina in partnership with Albemarle Corporation. It is worth noting that the Wodgina Project is one of the largest hard-rock lithium mines in the entire world. Besides, Mineral Resources also took the first step into hydroxide processing with its partnership with Kemerton.
Mineral Resources’ flagship lithium Project, Mt Marion in the Goldfields, has been expanded. The Company targets a production output of 900,000 tonnes of mixed-grade spodumene annually after its next stage of upgrades. Mineral Resources owns about 51% of the offtake with its partner, the Chinese giant, Ganfeng. We expect substantial revenue growth from the export of converted lithium hydroxide over the coming years. We also think that demands for battery metals and lithium-ion batteries to accelerate in the medium term. This will drive tremendous opportunities for Mineral Resources, which we believe the Company is uniquely positioned to capture more of the battery supply chain in this fast-paced growth market. Thus, Mineral Resources has interests in lithium deposits and has secured downstream partnerships with global reach.
Mineral Resources is assessing opportunities for lithium hydroxide production at its Wodgina mine. The Company also plans to implement a processing facility in the Pilbara similar to its existing one in Albermarle. This is the first step of a five years plan to strengthen the business access to the supply chain and collaboration with international partners securing the pipeline of the resources and products necessary to achieve global decarbonisation.
3. Mineral Resources set to quadruple its Iron Ore Production in the next 5-year period
This fiscal year will be an important one for Mineral Resources. It is a pivotal moment for the Company as its Mining Services business continues on its growth trajectory. According to Mineral Resources, the business is expected to double in size over the next five years, with the growth strongly contributed by the lithium business segment. Thus, Mineral Resources is ramping up to a full production capacity to take advantage of the upbeat in the lithium market, which shows no sign of weakening in terms of demand and prices.
Iron Ore business long-term growth opportunity
Besides the hyper-growth opportunity provided by the exposure to the lithium sector, Mineral Resources will continue the development of its Onslow and South West Creak Iron Ore Projects. These two Projects carry massive production capabilities, which can quadruple the Company’s Iron Ore output in the next five years. They are also low-cost operations, have a considerably longer life of mine, and can support Mineral Resources’ Iron Ore business for another 30 to 50 years.
The Iron Ore market has faced one of its price sharpest falls in history during FY20. Despite unfavourable trading conditions and inflationary pressure, Mineral Resources has been able to keep its costs in line with its Guidance and has exported nearly 20 million tonnes of Iron Ore throughout FY22. The Company has entered a new phase of its business development, entering into a Joint Venture with Hancock Prospecting. This new partnership will potentially bolster Mineral Resources export capacity to an additional 20 million tonnes of Iron Ore per annum.
Iron Ore near term demand might remain limited due to China’s economic slowdown
Mineral Resources’ biggest customers are in China, which continues to experience an economic slowdown, leading to a decline in demand for the red earth. Likewise, the iron ore price continued to weaken in recent months, retesting the lows of around $80 per tonne. The main driver of the decline in demand and prices is the Chinese property market crash. China is facing one of the steepest downturns in property activities, with the industry struggling with liquidity and policy from the government.
We believe that the news of near-term price fluctuations are worth considering, but it is important to remember that the economics of mining stack up in the long run. Whilst significant geopolitical, supply chain pressures and a tight labour market could affect Mineral Resources margins in the near term, we remain confident that the Company is well placed to continue delivering superior long-term shareholders value with its unique business model.
Mineral Resources continues to exhibit a long-term track record of successful operations, proven by an exceptional five years of gross profit margins above 87%. This has been realised despite varied operating and economic conditions.
FY23 is a pivotal year for Mineral Resources, as the Company intends to accelerate its transformation with the ambitious objective of becoming the global leader in lithium mining, processing, and global distribution. Besides, the Company is also ramping up its Iron Ore production capacity, which is expected to quadruple in the next five years. However, demand for Iron Ore remains capped in the near term due to the slowdown of the Chinese economy.
MIN remains an excellent stock combining the stability of an established business and long-term growth. However, there is a lot of uncertainty around China’s economic slowdown, which could affect the Company’s earnings in the near term. As of 1-Dec-2020, we are reiterating a “Hold”.