MinRes rallies as the lithium hydroxide plant strategy evolves

Mineral Resources (ASX: MIN) was up 3.73% in late afternoon trade after the company expanded on its lithium growth plans during a recent investor briefing and a visit to the company’s Wodgina mine in the Pilbara where the company and its partner, Albemarle are increasing production to meet soaring demand for EV batteries.

What clearly captured the market’s imagination today were revelations that the company believes it can build a 50,000 tonne a year Chinese designed and fabricated lithium hydroxide plant in WA for US$650m ($1.3bn).

Public funding

MinRes’s lithium hydroxide plant plans follows the green light recently granted to a Mt Holland lithium mine and associated hydroxide plant being developed between Wesfarmers (ASX: WES) and global lithium giant Sociedad Quimica y Minera de Chile (SQM).

While Albemarle has no interest in co-building a hydroxide plant at Wodgina with MinRes, the latter has advised investors that it could be eligible for critical minerals funding from the Australian government.

Other Key takeaways highlighted in a client noted issued by Goldman Sachs today included:

• Following a revised JV with Albermarle, MinRes plans to send spodumene to the latter’s 50ktpa hydroxide facility in Chengdu in China along with an expansion of specialty chemicals company’s 28ktpa facility near Shanghai.

• MinRes is targeting 120,000 tonnes a year of lithium carbonate equivalent (LCE) production from the Wodgina and Mt Marion mines in the next five years.

• The company could opt for a $10bn-plus demerger of the business while retaining its mining services and iron ore divisions.

• It’s understood JPMorgan has been assessing potential spin-off structures, and a potential US listing for the lithium business and Albemarle has previously hinted that it could be a future acquirer.

Progress at Wodgina

Management notes progress at Wodgina is proceeding well, with trains 1 to 3 potentially operating at 25% above nameplate capacity and produce 900,000-950,000 tonnes a year of spodumene for conversion into hydroxide.

Study work is now advanced on train 4 which will likely be larger than the existing trains, producing potentially up to 500ktpa of spodumene, with approval likely in first half of 2023 and ramp-up sometime mid to late 2024.

Meantime, MinRes is waiting on environmental and heritage approvals for the waste pre-strip and tailings dam capacity required to lift mining rates for processing train 3.

MinRes believe C1 costs should drop to $400/t (FOB) when train 3 is fully ramped up, 25% below the target at Mt Marion of $500/t.

Investment thesis

Goldman Sachs Buy rating on MinRes (price target $76) is based on:

• Compelling volume and earnings growth: The broker forecasts a more than doubling of group earnings (EBITDA) to over $2.4bn in FY23 driven by higher lithium and low-grade iron ore prices.

• Attractive valuation: Trading at around 1.2x NAV but on just 5x FY23 earnings (EBITDA), slightly above iron ore peers on 4x, but below lithium peers on 10x.

• Potential asset sell-downs to realise value, reduce capex and deleverage: While Goldman Sachs doesn’t assume a sell-down of any assets to fund capex, the broker notes that MinRes has many options to maintain a strong balance sheet and fund growth.

Mineral Resources share price over 12 months.