Materials

Is Mineral Resources’ burgeoning lithium business significantly undervalued?

Fri 22 Apr 22, 12:40pm (AEST)
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Key Points

  • Expansion plans include a doubling of spodumene processing capacity at Mount Marion lithium mine to around 900 ktpa by the end of 2022
  • The iron ore business remains on track to meet FY22 guidance for export shipments
  • After changing volume/growth assumptions in iron ore, lithium and mining services, Goldman Sachs has upgraded the company to Buy

Today’s quarterly update by Mineral Resources (ASX: MIN) serves as a reminder to the market why brokers [generally speaking] like what the unorthodox mining and mining services company – which combines iron ore, lithium and a crushing operations - is doing.

While there’s lots to like within today’s mining activities report, the standout is the arguably the joint decision with its partner, Jiangxi Ganfeng Lithium Co. Ltd (Ganfeng), to optimise recovery of lithium units from production at Mt Marion and to upgrade the Mt Marion processing facilities.

Expansion and restart: Lithium

Lithium still only represents a tiny component of Mineral Resources’ total profits.

But in response to significant strengthening of global demand [for lithium] plus record pricing, the company’s expansion plans include a doubling of spodumene processing capacity at Mount Marion lithium mine to around 900 ktpa by the end of 2022, after capital investment of $120m.

The company’s share of the expanded equivalent 6% spodumene concentrate (650 ktpa) equals around 100 ktpa of LCE (by lithium units). By comparison, Allkem Ltd’s (ASX: AKE) targeted FY22 production capacity is 50 ktpa LCE (on a 100%), and FY26 capacity is 145-to-158 ktpa LCE.

What’s noteworthy here is that this large processing facility coverts spodumene to lithium hydroxide, which is expected to be infinitely more profitable than revenue from spodumene production alone.

At Wodgina the production restart of processing Train 1 is also ahead of schedule, now expected in May 2022. And processing Train 2 is now scheduled to restart in July 2022.

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Activity report highlights

  • Mining Services production volumes of 63.4Mt were 16% higher than the prior corresponding period and the business remains on target to meet FY22 production guidance of 275-290Mt

  • The iron ore business remains on track to meet FY22 guidance for export shipments

  • The average realised iron ore price for the quarter was US$101.31 per dry metric tonne (dmt), 60% higher quarter-on-quarter

  • Significant engineering and detailed design work progressed at the Ashburton Iron Ore Project

  • Mt Marion remains on target to meet FY22 guidance of 450-475kt and costs of A$570-615/dmt

  • The company took possession of its 51% share of the Mt Marion spodumene concentrate offtake in February 2022

  • The company signed a non-binding letter agreement with Albemarle Corporation (Albemarle) to explore a potential expansion of the MARBL Lithium Joint Venture (MARBL JV)

  • Wodgina shipped 22k dmt of spodumene concentrate from existing stockpiles during the quarter at an achieved price of US$2,200/dmt

  • Well testing of the Lockyer Deep-1 conventional gas exploration well in the onshore Perth Basin was completed

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    Mineral Resources has consistently outperformed the materials index over the past year.

 

What brokers think

Intelligent Investor flags the company’s vulnerability to iron ore prices – which in the first half of 2022 experienced one of the swiftest declines on record – which saw $763m in earnings (EBITDA) last year shrink to just $156m for the first half of 2022.

However, the fund manager is impressed by the company’s investment in converting its iron ore mines from high-cost, low-quality, short-lived operations into better quality assets.

The fund manager also expects lithium as a part of total profits to grow enormously as the large processing facility is completed.

While Intelligent Investor was hoping to upgrade the company during choppy markets, the price remains above the fund manager’s $45 target price, and maintains at Hold up to $80.

Mining sector specialists at Morgan Stanley in Europe have put the stock on their global most preferred list.

The broker retains its Overweight rating and $56 target price after Mineral Resources updated expansion plans across Wodinga, Mt Marion and Kemerton.

Citi is encouraged by the company’s recent decision to increase lithium production in response to the voracious demand for the battery making component.

The broker retains a Buy on the stock and based on expected benefits from both raised iron ore and spodumene price forecasts has increased the target price to $76 from $66.

Macquarie sees the restart of train 2 at Wodgina and the earlier restart of train 1 as positive for the company.

The broker maintains an Outperform rating, and based on a medium-term earnings forecasts lift, due to higher spodumene production from Mt Marion and Wodgina, has raised the target price to $83 from $77.

After making six major changes to volume/growth assumptions in iron ore, lithium and mining services, Goldman Sachs has upgraded the company to Buy, with a target price of $70.80.

Consensus on Mineral Resources is Strong Buy.

Written By

Mark Story

Editor

Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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