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Date : 16/10/2023

Mineral Resources

ASX :

MIN

Market Cap : $12.27 Billion

Dividend Per Share : $1.90

Dividend Yield : 3.03 %

Buy

52 Week Range : $59.310 - $96.970

Share Price : $62.67

MIN is undervalued following the pull-back. Lithium and iron ore production is ramping up and will bring in considerable earnings in the future. We recommend a 'Buy.'

Company Analysis

Mineral Resources (ASX: MIN) was among the top 10 best-performing stocks in 2022. The performance was underpinned by the company’s aggressive lithium push and soaring lithium prices. This year, MIN shares are down ~22%, dragged lower by declining lithium prices.

Lithium contracts between producers and consumers are opaque, often done up on agreed fixed prices on long-term contracts. The prices are also seldom disclosed – protecting the producers. However, due to the lack of transparency, market participants use the China benchmark lithium carbonate prices as a proxy.

Lithium prices have slumped this year, and the supply-demand structure is evolving, which will ultimately dictate the future prices for the commodity. These are the strongest headwinds on the lithium price:

  • Slowing demand for electric vehicle sales in China. China is the world’s largest market for electric vehicles, and a slowdown in sales there has had a knock-on effect on demand for lithium. This is due to a number of factors, including the end of government subsidies for EV purchases, degrading consumer sentiment, and a weak economy.
  • Increased supply of lithium. New lithium mines and processing facilities are coming online around the world, which is increasing the supply of lithium on the market. This is putting downward pressure on prices.
  • Weaker demand from other sectors. Lithium is also used in other industries, such as batteries for consumer electronics and energy storage systems. However, demand from these sectors is also weaker at the moment, which is contributing to the overall decline in lithium prices. Lower input demand resulted in a 10% reduction in battery prices in August, according to key market players.


Source: Tradingeconomics

Lithium, the long-term Bet

We think these are short-term headwinds that have impacted the lithium price. The transition to greener technologies will only intensify as global economic growth returns, and there really is no alternative to lithium in the manufacturing of batteries.

MinRes’ bet on lithium is, therefore, significant. While they have had a bit of a rough year in lithium operations, which led to reduced guidance for full-year FY23, the company has put in place upstream and downstream capabilities.

For a full breakdown of MinRes’ operations, our earlier coverage can be viewed here.

MIN’s upstream strategy is to ramp up the existing mines and also look for inorganic growth. In the downstream department, they are focussed on the production of lithium batteries and battery packs. The company has a number of projects in development, including a lithium battery plant in Western Australia and a lithium battery pack plant in South Australia.

MinRes spent FY23 restructuring its arrangements for the long-term

MinRes is focused on maximising the potential of its world-class lithium portfolio through upstream exploration and expansion activities and prioritising industry partnerships that grow a globally diversified presence in the lithium battery supply chain.

For the full year FY23, record earnings were delivered, with Wodgina ramp-up continuing and maiden lithium battery chemical earnings. MIN renegotiated the MARBL joint venture agreement with Albemarle, completed construction of the Mt Marion plant expansion, and significant Mt Marion exploration results confirmed the opportunity for open pit extensions and underground potential.

Commercial arrangements with Albemarle have been simplified, with MIN agreeing to increase its ownership of Wodgina from 40% to 50%. Operations at Wodgina continued to ramp up, while production capacity at Mt Marion increased substantially.

In FY23, the successful construction and commissioning of upgrades to the Mt Marion spodumene concentrate plant supported a significant increase in production capacity. Promising early exploration results also signalled strong potential at depth, along strike and in the surrounding regions.

MIN aims to strengthen its ownership of the Wodgina lithium operation to 50%, while the first product was delivered from Train 2 of the site’s spodumene concentrate plant, and practical completion was met on Train 3. Expansion is now underway across second and third-stage mine developments and will provide access to additional ore.

As for downstream, prevailing lithium market prices prompted an agreement between MinRes and Ganfeng Lithium to cease a toll-treating agreement for Mt Marion spodumene concentrate. MinRes will sell its share of spodumene concentrate to Ganfeng at prevailing market prices.

Amendments to the MARBL joint venture arrangement between MinRes and Albemarle Corporation included Albemarle taking full ownership of the Kemerton lithium hydroxide plant it currently operates. Albemarle will pay MinRes an estimated US$380-400 million, including the net consideration for MinRes’ share of Kemerton and completion adjustments at Wodgina and Kemerton. MinRes will also transition to market its own share of Wodgina spodumene concentrate and chemicals via a dedicated marketing team and warehouse in China.

Lithium to Deliver over $2 billion Revenue Boost

The restructuring of the agreements is expected to benefit all three parties. MIN will gain access to Albemarle’s downstream lithium expertise and conversion capacity, while Albemarle will gain access to MIN’s Wodgina spodumene concentrate. Gangfeng will benefit from the simplified commercial arrangements and the alignment of interests between the three parties.

The restructure is also in line with MIN’s strategy of expanding its downstream lithium presence. The company is building a lithium battery plant in Western Australia and a lithium battery pack plant in South Australia. The new agreements will give MIN access to the conversion capacity it needs to support its downstream lithium strategy.

MIN is currently shipping around 300,000 tonnes of lithium per year from both of its operations. This is considering MIN’s 50% and 40% share in Mt Marion and Wodgina, respectively. However, the company has plans to increase production to 900,000 tonnes per year in the next few years. The increase in production is expected to have a significant impact on MIN’s earnings. Costs are expected to fall during this period – improving MIN’s margins from lithium operations.

With downstream processing capabilities coming soon, MIN will be able to capture value across the entire lithium value chain. The raw material will be converted to lithium hydroxide at the processing plants, fetching a higher price than spodumene – which means better earnings and margins for MIN.

Consensus estimates point towards MIN being able to grow revenues by $2.2 billion and EBITDA by ~$800 million by 2025.


Source: MIN

Iron Ore to Grow as well

MIN’s iron ore operation is not the most efficient when compared to some of the best ones in Australia. MinRes operates two iron ore operations in Western Australia, the Utah Point Hub and the Yilgarn Hub. Iron ore exports in FY23 totalled 17.5M wmt across both hubs, in line with combined FY23 guidance (17.2-18.8M wmt).

While the market may not be paying attention to what is happening in MIN’s iron ore business, the company continues to grow the segment. MIN is progressing with its strategy to transition to lower-cost, long-life operations.

The cornerstone of this change will be the Onslow Iron project, which is set to unlock billions of tonnes of stranded iron ore deposits in the Pilbara. In FY23, a Final Investment Decision was reached between MinRes and Red Hill Iron Ore Joint Venture partners Baowu, AMCI and POSCO.

With all major project approvals in place, MIN made significant progress, including the commencement of construction works at the Ken’s Bore mine site and preliminary works across haul roads and Onslow town and port infrastructure.

MinRes’ breakeven cost for Onslow Iron is in the 1st quartile of the global cost curve – making it a highly efficient operation and one that will contribute towards higher margins. Onslow is now ~40% complete, and the first ore is targeted for June 2024. It is estimated to produce 35Mtpa and comes with a 30+ year mine life. The FOB cost from Onslow is expected to be just $40/dmt, in strong contrast to MIN’s Utah Point Hub, which had a FOB Cost of $71/dmt in FY23.


Source: MIN

Growth Comes at a Cost

MinRes has to pay for all of this growth that’s to come from lithium and iron ore operations. MIN is a founder-led business with Chris Ellison owning 12%, and of course, he does not like the dilution of shares. This means debt levels are on the higher side.

Net debt sits at $1.9 billion, and Net debt/Underlying EBITDA is 1.1x. The available liquidity as of 30 June 2023 is $1.8 billion, including cash on hand of $1.4 billion. These levels have increased in FY23. Gearing has gone from just 18% to 40%.

Since the FY23 results, MIN completed a US$1.1 billion Senior Unsecured Notes Offering. The notes were offered at an interest rate of 9.25% pa and are due in 2028. MIN said the capital was raised for general corporate purposes, including for capital expenditures. As for capex, MIN is spending over $4 billion over the next 3-4 years for the lithium and iron ore production ramp-up. In FY24, the capex guidance is $2.75 billion, with the bulk ($1.97 billion) being used up for the iron ore Onslow development.

While these debt levels are high, it does not raise any red flags. MIN is a highly cash-generative business with over $1.6 billion of EBITDA being generated. Margins are also fairly high at 35%. As lithium production ramps up and downstream production begins in full swing, margins and cash flow will only increase.

MIN’s debt maturity profile shows that there is no debt that is due until 2027 – a time when lithium and iron ore operations should be at capacity. They also have $400 million of undrawn credit facility available to them.

Outlook & Valuation

MIN also issued production guidance for FY24. From the iron ore business, the company expects to ship 7.5 to 8.3Mt from Yilgarn and 9.0 to 10.5Mt from Pilbara Hub (which used to be called Utah Point). Both these assets are not the cheapest, and the FOB cost is $97 to $107/t and $67 to $77/t, respectively.

Coming to lithium, Mt Marion is expected to deliver 190 to 220kdmt to MIN and 170 to 200kdmt by Wodgina. Wodgina has a higher grade and is also a lower-cost operation than Mt Marion. FOB cost is expected to be $1,150 to $1,250/t at Marion and $875 to $950/t at Wodgina.


Source: MIN

For FY24, markets have priced MIN to deliver:

  • 9% growth in revenues to $5.2 billion
  • 8% growth in EBITDA to $1.8 billion
  • 25% EPS growth to $3.42

MIN paid $1.9 a share as dividends in FY23 at a payout ratio of ~69%. With debt increasing, markets are expecting the dividend payout ratio to be lower. The company also does not have a dividend payout policy, making it highly speculative to forecast future dividends.

We think MIN is undervalued following the pullback. It is currently trading at a P/E of just 16x FY24 and 10x FY25. Earnings from upstream and downstream lithium production have been priced into earnings estimates. However, the market is currently not valuing MIN as one of the largest lithium producers in the world, as it is forecasted to become. The risk on lithium prices has dictated the MIN share price, and we believe this is an opportunity for the patient investor.

Recommendation

Mineral Resources has changed. Mining services has taken a back seat, and the company has bet big on lithium. They aim to be a vertically integrated company with upstream and downstream capabilities. Production is being ramped up, which will see it go from around 300,000 tonnes to over 900,000 in the next few years.

MIN’s current iron ore assets are not the most efficient. However, this is about to change with Onslow Iron – a new low-cost, long-life asset that falls in the 1st quartile of the global cost curve. With lithium prices dictating the MIN share price trajectory, we think the market is undervaluing Mineral Resources. As such, we recommend a ‘Buy.

Technical Analysis

After rallying from a Corona Crash low of $12 to a high of $96 in less than 3 years, MIN’s share price has entered a correction phase. This correction phase has formed a downward channel on the chart. As such, we think prices near the lower boundary of the channel around $55 are attractive. This level also coincides with the 50% Fibonacci retracement level of the $12 to $96 rally. This adds to the importance of the $55 level.

Short-term traders can consider cutting losses in the case of a confirmed break below $55. Such a break would indicate a significant bearish sentiment on the stock that opens the way down to the 61.8% Fibonacci retracement level of $45.

In the case of a reversal in MIN’s share price, the first important resistance in front of the share price would be the upper boundary of the downward channel. Based on the current chart, this resistance will be around $68.

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

 

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