Is Mineral Resources out of the woods?

Mineral Resources (ASX: MIN) shares soared the most since January 2024 after the Foreign Investment Review Board (FIRB) approved the sale of a 49% interest in its Onslow Iron Project's haul road for $1.3 billion. The stock rallied 6.6% as the market opened on Thursday.

The transaction is set to be completed within 15 business days and inject MinRes with an upfront cash payment of $1.1 billion from Morgan Stanley Infrastructure Partners. An additional deferred payment of $200 million will be paid, subject to Onslow achieving a run rate of 35 million wet metric tonnes per annum in any quarter before 30 June 2026.

A business update accompanied the FIRB approval, which outlined:

• $180 million of FY25 CAPEX savings

• $120 million of FY25 operational cost savings

• Cost savings include a reduction to operational headcount by transitioning to a "two weeks on, one week off" roster (from two weeks on, two weeks off roster) at the Mt Marion and Wodgina operations

• There is no change to the FY25 production guidance for lithium and mining services

Why it matters

MinRes is feeling the pinch after a year of rapid gearing (net debt position more than doubled to $4.4 billion) and a sharp decline in commodity prices.

The challenging iron ore and lithium price environment resulted in a 40% fall in FY24 EBITDA to $1.05 billion. That values MinRes at a net debt-to-EBITDA ratio of approximately 4.4, up from 0.8 in FY22 and 1.8 in FY23.

The selldown matters because

#1 Balance Sheet Relief: The $1.1 billion cash injection will significantly reduce MinRes's net debt position.

#2 Improved Outlook: Goldman Sachs had projected MinRes's net debt to reach $6.1 billion in FY25. The analysts did not fact in the Haul Road deal. Today's announcement will likely prompt positive revisions to the company's financial forecasts.

#3 Short Covering: Short interest in MinRes recently hit a record high of 8.59% (up from 5.5% in June). The improved balance sheet outlook may alleviate some of these concerns.

MinRes 12-month short interest chart (Source: Shortman)

#4 Share Price Underperformance: MinRes shares had fallen approximately 60% since mid-May, underperforming peers like Pilbara Minerals and Fortescue (both down around 40% in the same period).

MinRes (blue), Fortescue (red) and Pilbara Minerals (green) | Source: TradingView

It's also worth noting that most ASX-listed lithium stocks are up 10-15% on Wednesday after China's CATL suspended its Jiangxi lithium operations.

Is MinRes out of the woods?

The Haul Road selldown will reduce MinRes' net debt outlook for FY25 by approximately 18% (under Goldman's forecasts and $1.1 billion in upfront cash payment).

While the percentage drop is large – It's still approximately $5 billion in net debt.

"The challenge is ensuring enough cash to fund growth against a deteriorating iron ore outlook (22% EBITDA) and stubbornly low spodumene prices (18%)," Citi analysts said in a note earlier this month.

"MinRes needs a catalyst to reinstall confidence in the balance sheet. Outside of a China stimulus wildcard, that could be pulling out more costs, drawing further on the $800 million revolver ... or a sell-down of energy."

At the end of the day, miners don't outperform unless commodity prices rise.

"Looking back across the last 40 years, we find that rising commodity prices are a prerequisite for miners to outperform," says UBS.

"With the momentum in Chinese economic data on a downward trajectory, it would seem a challenge for commodity prices to detach from this negativity."