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Date : 01/05/2023

Mineral Resources

ASX :

MIN

Market Cap : $13.93 Billion

Dividend Per Share : $2.20

Dividend Yield : 3.00 %

Buy

52 Week Range : $42.75 - $96.97

Share Price : $73.68

MIN's lithium assets are set to double in production, making it Australia's largest lithium miner. We recommend a 'Buy.'

Company Analysis

Mineral Resources (ASX: MIN) shares were hit this week as the company downgraded guidance in its March quarter update that was released on the 26th of April. MinRes is one of the highest quality businesses on the ASX, owned and managed by its founder Chris Ellison, who has proved to be a fantastic CEO – recognising opportunities and taking them at the right time, with his most recent exploit being MinRes’ foray into lithium.

The company has gone from a $100 million market cap business when it listed in 2006 to a $15 billion market cap business. Since recommending a Buy at around $43 back in 2021, we have held on to our thesis that MIN is attractive around the $65 – $70 range. Therefore, recommendations up until this piece have been a Hold. With MIN shares tumbling 9% on the back of that report and general weakness due to lithium prices crashing back down to earth, we think this is exactly the sort of opportunity we long-term investors wait for.

If MinRes is new to you, here’s what the company does in a nutshell. MIN has 4 areas of business – mining services, iron ore production, lithium mining, and an energy operation that could potentially become one of the largest onshore gas discoveries in Australia. The mining services business makes it the world’s largest crushing contractor, and MIN is one of Australia’s top 5 iron ore producers. While the lithium business has only recently been added, once 100% operational capacity is reached, it will become Australia’s biggest lithium miner. For more details, our earlier coverage can be viewed by clicking here or by visiting the dashboard for all our past coverage on MIN. With housekeeping out of the way, let’s get into what has changed at MIN and why we think this is an opportunity.

Iron Ore Business continues to pull its weight

MinRes owns two iron ore operations in Western Australia, the Utah Point Hub and Yilgarn Hub. In the first quarter of 2023, iron ore shipments were 4.5M wmt, up 10% qoq. Iron ore production and shipments across both hubs were in line with the mine plan and FY23 guidance (17.2-18.8M wmt). Quality control for the Yilgarn products continued to improve and, as a result, attracted broader buyer interest in the products.

After re-commencing in October 2022, lump production from Yilgarn increased to 29% and realised higher lump premiums as the quality stabilised. Utah shipments lagged production due to materials handling constraints in the wetter months and ship loader outages.

The Chinese steel industry prioritised raw material cost over productivity, and product discounts narrowed due to increased demand for lower-grade products. The average realised iron ore price for the quarter was US$109 per dmt, 12% higher qoq and representing an 87% realisation of the Platts 62% IODEX.

FOB costs at both hubs are expected to be at the upper end of the FY23 guidance range of $65-75/t for Utah Point and $85-95/t for Yilgarn. State royalty relief for Yilgarn ended during the quarter, with a State royalty rate of 7.5% of FOB price achieved applicable from February 2023.


Source: MIN

Lithium business temporarily stumbled

In the most recent half-year, MIN’s lithium division delivered big – achieving record earnings from strong pricing and increased volumes. In the March quarter, the lithium business was hit by delays at its key Mount Marion lithium expansion project.

During the quarter, MIN planned to accelerate its expansion activities to double plant capacity to 900ktpa of mixed-grade spodumene concentrate (100% basis) (570-600ktpa SC6 equivalent). A total of 725 people were on site to support the existing operations and the integration of the expansion. However, accommodation and flights have been challenging due to multiple projects in the region; this impacted MIN’s plans and was a temporary bump that MIN encountered.

Despite these challenges, MIN completed the crushing plant and is going through the final stage of commissioning. Construction works continue on non-process infrastructure and the beneficiation plant, and the Mt Marion expansion remains in line with the initial budget of $120 million. Completion of the expansion is anticipated to commence in mid-May.

MIN Downgraded Mt Marion Guidance

In line with production, Mt Marion shipped 62k dmt of 3.8% spodumene concentrate (50% share) over the quarter, up 6% qoq. The average realised spodumene concentrate price was US$3,367/dmt, including grade adjustments and product discounts. MinRes’ 51% offtake share of Mt Marion spodumene concentrate for the quarter of 63k dmt was converted into 4,420 tonnes of lithium battery chemicals under the toll-treating agreement with Jiangxi Ganfeng Lithium (Ganfeng). The average achieved price for lithium battery chemicals from Mt Marion was US$50,943/t.

The company expects Mt Marion FY23 volumes to be at the lower end of spodumene concentrate guidance of 160-180k dmt (SC6 equivalent) and lithium battery chemicals sold guidance of 19.0-21.3kt. The FY23 forecast volume range reflects the impact of the delay in completing the expansion project and mine sequencing, which resulted in the drawdown of contact ore stockpiles. Accordingly, Mt Marion FY23 spodumene concentrates FOB cost guidance has been revised to $1,200-$1,250/t (SC6 equivalent) (previously $850-900/t).

Wogdina Guidance also Reduced

Mining and processing at Wodgina continued to ramp up towards installed capacity, with 49k dmt (40% share) of 5.6% spodumene concentrate shipped, up 28% qoq. The quarterly spodumene concentrate 6% FOB equivalent price applied on Wodgina shipments to be converted to lithium battery chemicals for the June quarter is US$5,444/dmt.

During the quarter, 24k dmt of MinRes’ share of Wodgina spodumene concentrate was converted by Albemarle into 3,246 tonnes of lithium battery chemicals, up 5% qoq. Albemarle sold 1,504 tonnes of lithium battery chemicals on behalf of MinRes at an average realised price of US$74,781/t (exclusive of China VAT).

Wodgina remains on track to achieve FY23 spodumene shipped guidance of 150-170k dmt (SC6 equivalent) and lithium battery chemicals production guidance of 11.5-12.5kt. FY23 lithium battery chemicals sold guidance is reduced to 5.0-6.0kt from 8.5-9.5kt8. This reduction reflects current MARBL Joint Venture (JV) marketing arrangements, under which Albemarle is responsible for all sales, as well as short-term market dynamics.

Changes are in the pipeline

On completion of the Australian part of the MARBL Joint Venture (JV) restructure, MinRes will be responsible for marketing and selling its share of lithium battery-grade chemicals. This will allow MinRes to be in control of its sales. To support this, MinRes has established an office and warehouse in Ningbo, China, together with a sales and marketing team to manage future sales and logistics functions.

MinRes has now received mining and environmental approvals to expand the Wodgina mine. Development work and pre-stripping of the Stage 2 cut-back recently commenced. Mined ore feed to support the operation of three processing trains is now expected at the end of 2023 with a six to eight-month ramp-up.

After the quarter’s end, MinRes lodged an initial substantial holder notice disclosing a 19.55% interest in Essential Minerals (ASX: ESS). Essential’s Pioneer Dome lithium project is approximately 100km from Mt Marion. MinRes’ interest in Essential is consistent with the company’s focus on lithium opportunities in the Mt Marion region.

MinRes has reportedly considered transporting feedstock from Essential Minerals’ Pioneer Dome lithium project to its expanded Mount Marion operations. Additionally, MinRes holds a significant stake in Global Lithium, which owns the undeveloped Manna project located in the same region. As part of its plan to move further downstream, the company is studying the feasibility of constructing a lithium hydroxide plant in Kalgoorlie to process spodumene from Mount Marion and other sources. CEO Chris Ellison has been urging the Albanese government to provide tax breaks and grants worth billions of dollars to support the development of a lithium battery industry in Australia. However, it appears that the company is unlikely to receive the assistance it is seeking in the Federal budget. Nevertheless, MinRes has not given up on its plans to build a hydroxide plant at the Wodgina lithium mine, which it owns in partnership with Albemarle, the potential acquirer of Liontown.

The bottom line is that there is more growth to come and temporary roadblocks have impacted March quarter performance and possibly the current quarter. Markets are now moving to reflect these developments.

Mining Services is Drying Up

Mining Services production volumes were lower in Q3 at 52Mt, following the completion of two external mining contracts. Equipment and people were moved to joint venture projects, but delays in approvals impacted volumes. During the quarter, one new external crushing contract and two new mining contracts were secured, along with an extension to an existing haulage contract. As a result of the delays in approvals and delays associated with the award of new contracts, FY23 volume guidance has been reduced to 245-255 Mt from 270-280 Mt. This is a cyclical effect that cannot be controlled as miners are reducing their Capex to protect themselves for any possible recession and periods of subdued demand.

Investment Thesis

Smart Money Backs MIN at Current Prices

The quarter update was a rather huge one, and digesting all the information we discussed so far can prove to be quite the task. However, we’re here to make it simple. MIN’s business derives its value from mining services, iron ore, and lithium. The iron ore and mining services segments give the firm stability, while lithium gives it growth. Therefore, the share price is driven by what happens in the lithium space for the most part.

With the bad news now flowing through, markets have recalibrated, and we think MinRes is trading at fair value. Among institutional investors that are covering the stock, the updated target prices also suggest the same.

While target prices are not everything, the fact that smart money also backs our thesis is reassuring. This also means that current prices are well supported – which is an indicator of a good entry point for us long-term investors.

MIN’s Lithium Capacity to Double

MinRes has lots of growth in its pipeline. While the cyclicality of the iron ore and mining services business has broken the momentum on MIN, it is precisely the time long-term investors should consider the stock. Revenues and earnings will skyrocket once the lithium demand is back up to soaring levels from 2024 onwards. Complementing this is MIN’s projected lithium capacity growth.

This is what will push MIN’s growth in the short to medium term:

  • Restructured Albemarle joint venture – Multiple agreements covering asset ownership, downstream conversion capacity and marketing ownership.
  • Commenced Mt Marion site upgrades – Doubling production capacity to 900ktpa (mixed grade) and extended tolling arrangement with Ganfeng.
  • Arrival as battery chemicals producer – Converting 100% of spodumene to lithium battery chemicals.


Source: MIN

New Low Cost Iron Ore Mine will add 35 million tonne capacity per year

While iron ore is down, it is not out. It is the most critical infrastructure commodity, and the cycle will change once this global demand slump passes. These downturns are exactly when long-term investors should consider investing.

MIN is also doing just that. They are focused on low-cost, long-life projects, and the Onslow Iron Project will power growth in this business vertical.

Mineral Resources are developing Onslow Iron in a joint venture partnership with Baowu, AMCI, and POSCO (the Red Hill Iron Joint Venture). MinRes will deliver 100% of the Mining Services and Infrastructure to the project, including a crushing plant at the RHIOJV mine under a life-of-mine crushing services agreement; and haulage, port, and transhipping services to facilitate the export of RHIOJV products under a life-of-mine mine to ship services agreement.

Taking shape 150 kilometres east of Onslow, the project will ship around 35 million tonnes of iron ore per year and is set to be one of WA’s largest iron ore operations. The FOB cost is lower than MIN’s other iron ore operations, coming in at just $40 a tonne – less than half the cost of Yilgarn.


Source: MIN

High-Quality Business at Solid Value

When we last covered MIN, we said that MIN was close to fair value; however, with the slump in lithium prices, there was a high chance of volatility. This has transpired. Now, at these subdued lithium prices, MIN has encountered temporary operational hiccups and market demand slumps that have reduced the FY23 guidance – leading to the re-prising of MIN shares.

Medium consensus forecasts show that EPS for FY23 is now down to $5.8 a share. However, with demand expected to quickly rebound and production increasing, expectations for subsequent remain more or less unchanged. The median consensus EPS for FY24 sits at $9.02; for FY25, it is $7.83. This is baked into the share price.

Valuations show that MIN is fairly priced. These prices are very modest for the growth that it offers – that is, lithium production doubling and iron ore production also being bolstered. A P/E of 11.8x that is then expected to trend lower is a good price point for a solid mining business led by a proven founder-CEO.

As for MIN’s financial health, it is in a very strong position. As of 1H23, which is the last audited account, MIN holds cash of $1.7 billion and debt of $1.4 billion. However, the debt maturity profile shows that there is nothing due for repayment until FY27. Additionally, MIN has $400 million in undrawn bank credit facility to boost any acquisition plays. From a cash flow standpoint, MIN remains in a position of considerable strength and remains unchanged from our earlier coverage in February 2023.

As for dividends, MIN shares currently trade with a dividend yield of 3%. With a downgrade in guidance, MIN’s dividend policy for full-year FY23 is hard to estimate. The following year onwards, expect dividends to be on track and maintain its historical payout ratio of around 45-55%.

Recommendation

There’s no doubt that we have always liked Mineral Resources for its excellent assets and proven founder-CEO. It is a solid growth stock that gives investors exposure to the reliable iron ore and mining services industries and recently has added the highly lucrative lithium industry as well. Production is set to double in lithium, and a new low-cost iron ore project will add to MIN’s cash flows. However, in recent times, we have found it hard to recommend it at high prices that were dictated by the surge in lithium valuations.

As lithium prices slumped and MIN encountered a few temporary headwinds, we think this is exactly the opportunity long-term investors should grab with both hands. Valuations are modest, the company is on its way to becoming Australia’s biggest lithium miner, and once global demand rebounds, so will MIN’s share price.

After rallying to an all-time high of $95 in January 2023, MIN’s share price is consolidating its gains above the important support level of $68 (the green line on the chart). From a technical analysis perspective, price retracements towards the support level around the 50% Fibonacci retracement level at $70 are attractive for buyers. Short-term traders can consider stopping their losses in the case of a confirmed break below the important support level of $68. A confirmed break below this level would indicate a possible shift in the sentiment on the stock to bearish, which can open the way down to lower levels in the short term. We recommend a ‘Buy.’

Mineral Resources, Weekly Chart in Semi-log Scale (Source: Metastock)

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