South32's shutdown drives upside for Jupiter Mines – The ASX's largest manganese miner

South32 (ASX: S32) suspended operations at its Groote Eylandt Mining Company (GEMCO) after key infrastructure was destroyed by Tropical Cyclone Megan over the weekend.

The GEMCO operation supplies approximately 10% of the global manganese market, with a prior guidance for FY24 of 1.7 million tonnes.

"The supply disruption at GEMCO could lead to a tighter manganese market in the short term, in our view. Over the last few years, we note manganese prices have spiked repeatedly as prices were sensitive to supply disruptions," Macquarie said in a note on Wednesday.

The analysts expect GEMCO shipments to resume in FY25 and expect nil sales for the remainder of FY24 and the first quarter of FY25.

Enter Jupiter Mines

Jupiter Mines (ASX: JMS) is the largest manganese miner on the ASX, with 49.9% ownership of the Tshipi Project in South Africa. Tshipi is currently a top five global producer of manganese, with stable production, comparatively low cost sand a mine life of more than 100 years.

GEMCO's shutdown has helped Jupiter Mines shares rally almost 20% in the last two sessions, lifting its 12-month performance to breakeven. The stock is down around 50% from late 2019 highs, partly owed to the downward trend in manganese prices.

Source: Macquarie Research

The Tshipi Project produced 1.8 million tonnes of manganese in the first-half of FY24 (FY23: 3.3 million tonnes). During the same period, the company reported $16.1 million net profit, down 65.5% year-on-year due to a 30.3% decrease in manganese prices and a 5.8% increase in cost of production.

"Yielding the GEMCO Benefits"

Macquarie says the GEMCO shutdown could lead to tighter market as port stocks unwind. Their price forecasts for the fourth quarter of FY24 was increased by 18% to US$5.00/dmtu (dry metric tonne unit) as well as 29% for the first quarter of FY25 to US$5.50/dmtu. Manganese prices are currently trading around US$4.1/dmtu.

"We note that on our upgraded forecasts, Jupiter Mines has attractive free cash flow yields of 10% in FY24E, 22% in FY25E and 16% in FY26E. Jupiter Mines passes its cash flow through as dividend with the yields being 9-12% over the same period."

Profits equal dividends

There were three interesting data points from Macquarie's note.

1. Production Aspirations: Jupiter Mines has aspirations to be the largest manganese producer globally by lifting its production by 300% over the next five years. "We believe it has levers to pull both organically (mine; processing and logistical de-bottlenecking) and inorganically via Tshipi consolidation and M&A activity in the Kalahari Manganese Fields (KMF)," the analyst said.

2. Dividends: Jupiter Mines has paid out more than 83% of its current market cap in dividends over the past four years, according to Macquarie. Despite its growth aspirations, it plans to maintain a 70% dividend payout ratio.

3. Manganese prices bottoming: Jupiter Mines has largely traded as a proxy to manganese prices. However, this correlation eased over 2022 due to management/board changes. "The strategy is now in place, with a board focused on growth and manganese prices appear to have bottomed. These could provide a tailwind for JMS and a recommencement of the correlation," says Macquarie.

Macquarie retained an Outperform rating on the stock and raised its target price by 20% to 30 cents.

Jupiter Mines 12-month price chart