Materials

MinRes jumps as lithium spin-off talks gather traction: Re-rating on cards

By Market Index
Fri 09 Sep 22, 1:37pm (AEST)
Spinning top
Source: unsplash

Key Points

  • MinRes up 11% on speculation a US listing of its lithium assets is now in play
  • A split is expected to help close the significant gulf between the value of MinRes's shares and specialist lithium companies
  • The lithium operation has long been regarded as MinRes's unrealised jewel

Mineral Resources (ASX: MIN) was up 11% at noon to a record high of $72.75 after the S&P/ASX50 company responded to speculation that it's preparing to list its lithium arm in the US which stands to create billions of dollars of value for investors.

It’s what MinRes didn’t say this morning that seems to have resonated loudest with the market: Namely that a US listing is by no means out of the question.

Within a succinct note to the market this morning, MinRes acknowledged pondering strategic options for its lithium business but noted that “any such considerations aren't advanced or certain or certain to warrant disclosure.”

Value play

It’s understood investment bank JPMorgan has been doing preparatory work on an eventual float of MinRes’s lithium mining and processing operations in a separate entity on the New York Stock Exchange (NYSE).

The board is clearly mindful that a possible split would help to close the significant gulf between the value of its shares and specialist lithium companies, such as US-listed Albemarle which made around US$4.3bn revenue in the last year.

Growing speculation of a pending lithium spin-off follows recent restructuring of the company into four separate business - mining services, iron ore, lithium and energy – within one centralised group.

Rough diamond

MinRes currently has direct interests in two lithium mines, Mount Marion and Wodgina, and a lithium hydroxide processing plant, Kermerton, both in WA. 

As small as it is, MinRes’s lithium operation has long been regarded as the unrealised jewel, which is expected to grow exponentially on the back of a large processing facility to convert spodumene to lithium hydroxide.

While MinRes is the largest spodumene concentrate producer, lithium hydroxide is understood to earn ten times the revenue of spodumene production.

image
Mineral Resources share price over 12 months.

 

What brokers think

For the uninitiated, MinRes mines both iron ore and lithium, with the former representing by far the lion’s share of total profits.

 

MinRes is also the world’s largest crushing business which crushes for most of the majors in the iron ore business.

 

Consensus on MinRes is Strong Buy.

 

Based on Morningstar’s fair value of $73.72 the stock appears to be undervalued.

 

Goldman Sachs rates MinRes a Buy (target $69.50) based on:

 

  • Compelling near-term volume and earnings growth

  • Attractive valuation trading at around 1.1x NAV, below global peers on circa 5-6x

  • Potential asset sell-down

 

Based on the six brokers that cover MinRes (as reported on by FN Arena) the stock is currently trading with 13.2% upside to the target price of $79.76.

 

Credit Suisse believes Mineral Resources' four divisions of Services, Iron Ore, Lithium and Gas have traded for the price of the lithium division alone, and expects a lithium spin off to see shares re-rate by as much as $90 per share. 

 

After releasing plans to increase its stake in the Onslow Iron project in the West Pilbara region of WA and build, fund, own and operate all of the infrastructure, Macquarie has retained its Outperform rating and $100 target.

 

The broker believes 57% of MinRes’s net present value can be attributed to its lithium arm.

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