Goldman Sachs says it's time to sell MinRes + More pain for lithium price

Goldman Sachs says the lithium market is expected to move into a ‘high surplus phase’ over 2024-25 on new supply entering the market and expect spodumene prices to fall as low as US$1,800 a tonne (from spot US$4,000) next year.

Earlier this week, Mineral Resources (ASX: MIN) confirmed the mutual early termination of a toll treating agreement with its joint venture partner Ganfeng, which seeks to convert Mt Marion spodumene concentrate into lithium battery chemicals.

When lithium prices were running hot, toll treating arrangements were viewed as another avenue for miners to extract value from their products. Under the arrangements, the miner will receive the value of the lithium hydroxide price less a prearranged tolling fee and other costs.

Pilbara Minerals (ASX: PLS) was arguably one of the first ASX-listed lithium names to progress a tolling agreement in February this year. Back then, Macquarie said “the implied spodumene prices of US$8,304/t through tolling are materially higher than the potential achievable prices of US$6,268/t on the BMX platform.”

In layman’s terms,without sky-high lithium prices, many of these tolling arrangements are now loss making.

No More Hydroxide

MinRes withdrew its prior lithium chemicals guidance of 19,000 to 21,300 tonnes for FY23 and said it will continue to sell spodumene to Ganfeng.

“Based on our lithium chemical pricing, we had MinRes losing money on the arrangement in FY24, so the removal is positive for our FY24 earnings,” Goldman Sachs analysts said in a note on Tuesday, adding that “we now assume the new agreement remains for Life of Mine (i.e. no toll treating) and so our Mt Marion NPV has fallen by ~20% to A$1.25bn.”

“The new crusher at Mt Marion is being commissioned, which is a slight 1-month delay on the last update, and overall around 7-months late vs. original plan.”

Fully valued against peers

Goldman Sachs has rated MinRes a SELL with a $59.00 target price.

“MinRes is pricing in long run commodity prices ~15% higher than our estimates,” analysts said.

“MinRes is also trading at ~11x NTM (next twelve months) EBITDA (vs. Aus lithium peers on 6x and large cap iron ore peers at ~5x).”

From an operational perspective, the analysts still expect the company to more than double both lithium, iron ore and mining services volumes in the medium term.

But don’t expect this to bolster the bottom line.

“However, due to a step-up in growth capex at Ashburton and payments to Wodgina JV partner Albemarle, and our below consensus lithium price forecasts, we forecast negative FCF across FY 23-25,” analysts added

Mineral Resources 12-month price chart (Source: Market Index)