Mineral Resources has not been this oversold since the GFC
Historical data suggests MinRes typically rebounds from extreme oversold levels. However, current circumstances may challenge this pattern.
Source: Shutterstock
Mentioned
KEY POINTS
- Mineral Resources faces multiple challenges, including the closure of its Yilgarn iron ore mines, high capex, and falling commodity prices, leading to a 30% stock decline since May
- Historical data shows MinRes stock, currently at oversold levels (RSI 16), tends to rebound, but timing remains crucial to avoid potential further declines
- Despite short-term headwinds, MinRes plans significant growth across its businesses, with analysts cautiously optimistic about long-term value creation potential
Mineral Resources (ASX: MIN) has been on a relentless downtrend, shedding nearly 30% of its value since late May and down 19 out of the last 22 trading sessions. The sharp selloff stems from long list of bearish catalysts, including:
The decision to close its Yilgarn iron ore mines
Substantial capital expenditure overhang
A strained balance sheet
Falling iron ore prices
Falling lithium prices
The stock's rapid descent has pushed it into deeply oversold territory. Its Relative Strength Index (RSI) now stands at 12 – a level of weakness not seen since the depths of the 2008 Global Financial Crisis. For perspective, even during major market selloffs like the COVID-19 pandemic, MinRes' RSI only dipped to the low 20s.
Historic returns from oversold levels
MinRes' diversified portfolio has historically buffered it against iron ore price fluctuations, as seen during China's Evergrande collapse in 2021 and the prolonged sub-US$50/tonne period of 2015-2016.
Since 2008, MinRes has traded at an RSI below 26 – which represents two standard deviations from the mean – only 56 times. And around half of these instances occurred in 2008 and 2014. In other words, you rarely see the stock this oversold.
To analyse the forward returns from oversold conditions, we examined the first instance of RSI below 26 in each month, which yielded 16 data points. The results show:
Source: Market Index
While forward returns generally improve over longer periods, the probability of positive returns ('% Positive') only reaches the mid-60s at best.
As simple as it sounds, an oversold stock can become even more oversold. Buying too early risks catching a falling knife scenario, much like what happened in 2008. During that year, the 22 instances of RSI below 26 resulted in average returns of:
1 month: -24.8%
3 month: -17.7%
6 month: 0.8%
12 months: 112.2%
So it did take a while for things to turn around.
Today's problem
Earlier this week, MinRes announced the closure of its Yilgarn hub by the end of 2024, earlier than anticipated by with minimal impact on FY25-26 earnings. The strategic move allows for the redeployment of resources to higher-margin assets like Onslow.
While the closure will reduce short-term cash flow, the sale of a 49% interest in the Onslow iron ore project for $1.2 billion is is expected to provide a substantial cash injection, strengthening MinRes' balance sheet.
Analysts have been concerned about recent capital expenditures and debt levels but the sale proceeds should significantly aid in debt reduction.
To add some perspective, here's what Citi has forecasted over the next three years. I've included some other metrics from their model (CAPEX, free cash flow and price-to-earnings) to provide some extra context.
Profit & Loss (A$m) | FY23 | FY24e | FY25e | FY26e |
|---|---|---|---|---|
Revenue | 4,779 | 4,739 | 4,996 | 5,913 |
Reported net profit | 243 | 468 | 197 | 392 |
Capex | -1,592 | -3,000 | -1,190 | -657 |
Free cash flow (ex acquisitions) | -460 | -1,801 | 718 | 1,053 |
Free cash flow yield | -2% | -16.5% | 0.6% | 7.8% |
Price-to-earnings | 15.2 | 74.8 | 59.8 | 30 |
While we're not facing a global financial crisis, MinRes is navigating an unprecedented CAPEX cycle. This situation casts a shadow over the company as dividends are slashed and free cash flow yield turns negative. However, the company has laid out an ambitious plan to grow volumes across its mining services, lithium, and iron ore businesses by 200-400% over the next five years.
Source: MinRes half-year FY24 results presentation
Despite these short-term challenges, analysts remain cautiously optimistic. They're focusing on the company's potential for long-term value creation through strategic resource reallocation and growth in other operations.
The latest broker ratings on MinRes include:
Morgan Stanley – Overweight with $79.00 target price
Citi – Buy with $80.00 target price
Macquarie – Neutral with $62 target price
The key questions now are: At what point can we look beyond the near-term pain? And are there any more CAPEX surprises on the horizon?
