Following the V-shaped movement in Mineral Resources (ASX: MIN) from above $60.00 last July, to sub $40 mid-November, back up to $53.50 today, investors could be forgiven for wondering what constitutes an attractive entry point on the mining services company.
While the company hasn’t updated the market since announcing a Lithium development partnership with Pantoro Limited (ASX: PNR) a week ago, recent attention from two brokers appears have helped push the share price higher.
With strong electric vehicle (EV) sales volumes supporting a four-year run of record spot lithium prices, Macquarie yesterday upgraded earnings for Australian lithium miners.
The broker notes that while Mineral Resources share price currently reflects the company's lithium and non-iron ore mining services, the bulk of upside is expected to come from the company’s high-cost, low quality iron ore business.
As a result, Macquarie, which retains an Outperform rating on the stock, has upgraded company earnings 14% to 26% across FY22 to FY24.
Meantime, while UBS forecasts include the resumption of production at Wodgina, plus higher lithium price forecasts, the broker believes the company's strategy is oriented around a more defensive mining services segment, with iron ore and lithium adding growth upside.
UBS has a Buy rating on the stock and has raised its target price 20% to $54.15.
The defensive mining services segment UBS is referring to is the crushing business, which while remaining largely under-appreciated is said by some institutional investors to be the company’s most prized asset.
For example, Intelligent Investor analysts think the services businesses alone could be worth $25-$30 a share.
While crushing volumes have grown at around 20% annually, current demand would suggest this will only continue.
The fund manager also expects iron ore business to become more profitable as increases in grade and logistics continue to lower costs.
As result, life-of-mine service contracts are also expected to expand services income, with new infrastructure potentially being shared with other producers.
While it will require capex, the fund manager thinks the iron ore business could be worth another $10-$15 per share.
Based on a bullish outlook, the fund manager also suspects lithium could be worth anything from $10 to $30 a share.
Intelligent Investor regards Mineral Resources as a stock to own for the duration and recommends starting to buy in below $45.
Consensus is Moderate Buy.
Based on Morningstar’s fair value of $46.36 the stock looks overvalued.
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