Is Mineral Resources in trouble?

Mineral Resources (ASX: MIN) shares fell 11% as the market opened on Thursday, to levels not seen since October 2021 after ditching its dividend for the first time in more than a decade.

The FY24 result reads poorly at face value but the numbers are largely in-line with analyst expectations, amid well-documented trends such as falling lithium prices and capex commitments.

FY24 Results Summary

• Revenue +10% to $5.27 billion

• Underlying EBITDA -40% to $1.05 billion

• Statutory net profit after tax -53% to $114 million

• Final dividend nil and total dividend for FY24 of 20 cents per share

• Available liquidity of $2.88 billion, including $908 million cash

• Net debt +133.5% to $4.42 billion

To add some perspective, UBS (26-Jul) forecasted FY24 EBITDA of $1 billion, net profit of $97 million and a total dividend of 20 cents per share.

Poor Guidance, High Capex

MinRes provided FY25 guidance on key metrics including:

• Mining services production volumes between 295-315mt

• Iron ore production between 21.5-24.7mt

• Lithium production between 480-545kt

• CAPEX of $1.95 billion

The numbers missed Goldman Sachs forecasts (dated 29 Jul):

• Mining services volumes of 339Mt (vs. 305Mt midpoint)

• Iron ore production of 23.5Mt (vs. 23.1Mt midpoint)

• Lithium production of 624kt (vs. 512.5kt midpoint)

• CAPEX of $1.16 billion

State of Play

MinRes finds itself in a heavily leveraged position, with $4.4 billion in debt and plans to spend almost $2 billion on capex in FY25. The company's FY24 EBITDA of $1 billion puts its net debt-to-EBITDA ratio at 4.4, a significant increase from 0.7 in FY22 and 1.8 in FY23.

Rather than opting for a capital raise, which would have diluted existing shareholders and potentially further depressed the share price, MinRes chose to take on more debt. This decision may result in short-term pain but could lead to long-term gain if commodity prices recover.

Managing Director Chris Ellison commented on the company's conservative approach: "Given the stubborn lithium price and our remaining investment in Onslow Iron, we will continue to take a conservative approach during FY25, deferring expansion projects and focusing on cost reduction and cash preservation. This approach was reflected by the Board's decision to not declare a final dividend for FY24."

Risk vs. Reward

MinRes is targeting significant volume growth across its four key businesses: mining services, lithium, iron ore, and energy. To illustrate this growth, we can refer to a chart from the company's February 2024 results presentation. However, it's important to note that this information is now slightly outdated and should be considered for illustrative purposes only

Source: MinRes half-year FY24 result presentation

Most analysts expect FY25 to be even more challenging than FY24 due to lower iron ore and lithium price assumptions. UBS forecasts the following numbers for FY25:

• Revenue to be relatively unchanged at $4.4 billion

• EBITDA to fall 6% to $940 million

• Net loss of $164 million

• No dividend

• Net debt to EBITDA to rise to 5.3x

Analysts anticipate MinRes returning to profitability in FY26 as commodity prices stabilise, volume growth materialises, and CAPEX commitments decrease. But this outlook depends on various factors and assumptions.

Potential risks include unexpected increases in CAPEX costs, continued weakness in lithium and iron ore prices, and a more challenging debt position.

On the upside, the company could benefit from higher-than-expected commodity prices, successful navigation of FY25 challenges, operational excellence in meeting guidance targets, and timely, on-budget delivery of growth projects.