MinRes’ earnings set to double in FY23 amidst falling lithium prices and capex headwinds

Mineral Resources (ASX: MIN) posted one of those results that read well at face value but fell well-short of analyst expectations. 

Management reported revenue growth of 74%, to $2.35 billion, and net profit growth of 1,890%, to $390 million. 

The business is cycling some pretty easy numbers from a year ago however, where revenue was down 12%, to $1.4 billion, and a net loss of $36 million. The dismal first-half of FY22 was driven by a significant reduction in iron ore revenue and cost inflation. 

The result failed to hit analyst expectations of $2.41 billion for revenue and $465 million for net profit. 

After running the ruler over the result, Goldman Sachs retained a NEUTRAL rating for the stock with a $83.00 target price. Here are the key takeaways:

Weaker-than-expected everywhere

On 1H23 earnings: EBITDA and net profit was 10% and more than 20% below Goldman estimates respectively, due to “lower than expected earnings from iron ore and lithium spodumene due to higher costs, and lower margins from mining services.”

On production guidance: Production and cost guidance for FY23 was unchanged. Lithium hydroxide production and sales guidance for FY23 was provided for the first time for both Mt Marion and Wodgina which were approximately 10% below Goldman estimates.

On spodumene guidance: Medium term spodumene guidance for Wodgina was increased to 960,000 tonnes per annum from 750,000tpa but at much lower grades of 5.5% (prior 6.0%). 

On mining services: “Mining services lost a few contracts in the half which combined with cost push lags impacted margins (21%), but MIN signed up 3 new contracts so MIN expects a recovery in 2H.”

Earnings to double in FY23 but cash flow underwhelms

Goldman expects lithium prices through the first-half of FY23 to reflect “near-term tightness and lagging spodumene contract price pass-through before declining over 2H23.”

The outlook for the second half includes spodumene falling to approximately US$3,500 a tonne and hydroxide to approximately US$40,000 a tonne (from current levels of US$5,800 and US$70,000 respectively).

Price weakness aside, the analysts still expect Group EBITDA to more than double to $3 billion in FY23 thanks to higher lithium volumes, tailwinds from lithium pricing lags and an improvement in iron ore price realisations.

The compelling near-term volume and earnings growth is offset by low free cash flow yields of -3% in FY24 and -9% in FY25, reflecting lower lithium prices and high capex associated with Ashburton and investments in China-based lithium plants.