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Company Overview: Mineral Resources Limited is a provider of mining infrastructure services in Australia. The Company is engaged in the integrated supply of goods and services to the resource sector. The Company operates in three segments, which include Mineral Services and Processing, Mining, and Central. The Company provides pit to port solutions across the mining infrastructure supply chain, including mining, crushing, processing, materials handling and support logistics. Its integrated infrastructure services include remote, mine-site accommodation services; remote power services; dewatering; equipment hire; mobile processing services; pipeline and water solutions; port logistics; ship loading; commodity sales and marketing; mine scheduling and grade control, and beneficiation services. It operates as a mining services contractor, infrastructure owner, infrastructure manager and mine operator based on prudent selection of critical infrastructure projects.
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MIN Details
Performance for the First Half of FY 19: Mineral Resources Limited (ASX: MIN) happens to be an international metal & mining company that has major operations in Australia, China and Singapore. The company, during the first half of FY 19 delivered EBITDA amounting to $72 million, which is in line with the guidance given by the company for FY 2019 which was after the unrealised accounting loss with regards to the company’s investment in Pilbara Minerals Limited of $30 million. The normalised EBITDA (i.e. after adding back the unrealised loss) stood at $102 million.
Overall during the first half of FY 19, the net profit after tax (NPAT) had declined by 92% to $13 million on pcp. For 1H FY 2019, both the revenue and profits were lower than the previous corresponding period (pcp). This was on the back of the suspension of the activities of Direct Ship Ore (DSO) at Wodgina Lithium Project in September 2018, delay in getting the approvals for the new Koolyanobbing Iron Ore Project which resulted the first ore shipping in December 2018 in place of at the end of September 2018, receiving lower price for its iron ore from the Iron Valley Project driven by high discounts for the fines and impurities and the company got delayed for the ramp-up of all-in 6% spodumene concentrate from Mt Marion. Therefore, MIN has now scheduled to commence all-in 6% shipments in 2H FY 2019 compared to the previous plan to start it within the second quarter of FY19. The company has a favorable outlook at the back of generating decent fundamentals by focusing on growing its core mining services business via innovation, profit share projects and its own commodity projects coupled with an industry leading safety performance. In a nutshell, we are still optimistic about the company's performance in the future largely because the company's investments are expected to pay-off well moving forward while delays in shipment and short-term challenges to performance are noted. Moreover, as noted by MIN, increasing income would also provide greater borrowing capacity which might help it in funding projects.
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1H FY 19 Financial Performance (Source: Company Reports)
McIntosh Joint Venture Of MIN Received Positive Assay Results: Hexagon Resources Limited had reported the summary of results for McIntosh Joint Venture drilling program which got completed in late October 2018. Mineral Resources, which happens to be the manager of McIntosh Joint Venture, had received all assay results and wrapped up the data compilation. The participants to McIntosh Joint Venture are Mineral Resources (51%) and Hexagon (49%). A total of 10,672.9 metres, which comprises 87 drill holes, was wrapped up at Emperor and Wahoo deposits and the Mahi Mahi and Threadfin exploration targets.
The release also added that around 12 tonnes of additional drill core sample was generated for the utilisation for pilot scale test work to optimise flow sheet and generate samples for marketing and downstream test work.
The notable mineralised intercepts include:
Emperor
Wahoo
Operational Performance & Developments During 1H FY 2019: Mineral Resources reported 12% fall in the total Mining Services & Processing revenue to $467 million in 1H FY 2019 when compared to pcp and the company’s EBITDA also fell by 32% to $88 million below pcp. Mineral Resources’ mining revenue during 1H FY19 declined by 40% to $408 million on the back of downscaled operations at Wodgina and also due to the pause in Yilgarn mining operations.
In 1H FY 2019, the company had achieved the average iron ore price of $63.8/wet tonne for the two operational sites, after making adjustments of all statutory and index adjustments shipped at Iron Valley, which was a net 24.9% discount to Platts (adjusted for moisture), and $81.1/wet tonne shipped at Koolyanobbing, which was a net 7.0% discount to Platts (adjusted for moisture). These results were on the back of an unfavorable mix of fines to lump iron ore sales at Iron Valley, as both fines iron ore and products with higher impurities, were based on a heavily discounted market. During the first half year of FY19, the company had exported 4 million tonnes of iron ore with the realised prices of $65.2/wmt, which forms 77% of the average Platts 62% index price.
Decent Standing from Margins’ Perspective: It can be said that Mineral Resources is in a decent position with respect to the margins in FY 2018. Its net margin stood at 16.7% in FY 2018 reflecting YoY improvement of 2.9% demonstrating the company’s strengthened capability to convert the top line into the bottom line. Also, the net margin has improved over the past five years to FY 2018 (FY 2014-FY 2018). In FY 2014, the company’s net margin stood at 12.1%.
The company’s operating margin has also witnessed a marginal YoY improvement of 0.8% and stood at 20.5% in FY 2018. However, the company’s net margin, at the end of December 2018, stood at 2.4% and its EBITDA margin stood at 18.3%. During the same period, the company’s return on equity (or ROE) stood at 1.1%.
Major Initiatives During First Half of FY 2019: During the first half of FY 2019, Mineral Resources entered into binding Asset Sale and Share Subscription Agreement with Albemarle Corporation for selling 50% of the Wodgina Lithium Project for the total consideration of US$1.15 billion, which after completion will lead to formation of a 50:50 joint venture. The company spent about $400 million during 1H FY 19 on the construction of world-class lithium mining and processing facilities at Wodgina and Mt Marion.
During the first half of FY 2019, the company had acquired additional equity in Mt Marion to increase the company’s stake to 50%. The company during the period had completed the acquisition of Koolyanobbing Iron Ore Project, which has enabled the operations in the Yilgarn region to continue. Mineral Resources had formed a 50:50 joint venture with Brockman Mining Limited regarding the Marillana Iron Ore Project in the Pilbara. The company also acquired the Kumina Iron Ore Project in the Pilbara and also achieved substantial progress across the portfolio of innovation projects.
Cash & Capital Management: During the first half of FY 19, Mineral Resources’ capex rose by a whopping 598% as they invested heavily across a number of important projects strategically. This included the work towards the completion of Wodgina Spodumene Concentrate Project, Mt Marion Upgrade Project, ramp up of the Koolyanobbing Iron Ore Project and the acquisition of Kumina tenements. The company will continue to invest into 2H FY 2019 as it has plans to complete the projects at Wodgina & Mt Marion. At 31 December 2018, the group’s cash and cash equivalents fell to $136 million from $240 million at 30 June 2018.
In H1 FY 2019, the net cash from operating activities before interest and tax fell to $22 million from $222 million in pcp due to low EBITDA, which is temporary, and a rise in working capital due to the ongoing development phase of the projects. During 1H FY 2019, the net cash used in investing activities rose by $422 million to $488 million from $66 million on pcp. Moreover, at the end of the 1H FY 2019, MIN had cash and undrawn cash debt facilities of $251 million. The company had also declared a fully franked interim dividend amounting to 13 cents per share to the shareholders, who will register on or before 18 March 2019. It will be paid on 17 April 2019. The interim dividend has declined by 48% as compared to an interim dividend of 25.0 cps for 2018 due to the company’s current investment in longer term growth projects. As per the company’s dividend policy, 50% of projected net profit after tax is made available for distribution, out of which, one-third is payable in the form of an interim dividend.
Farm-in and Joint Venture Agreement with Brockman Mining Limited: Recently, the group had announced that following the execution of the Mine to Ship Logistics Agreement, the Farm-in and Joint Venture Agreement (FJVA) which was entered into between Brockman Mining Limited and MRL on 27 July 2018 in relation to the Marillana Iron Ore Project (Marillana) has become unconditional and the farm-in period has started. After the satisfaction of the farm-in obligation under the FJVA, Brockman and MRL will form an unincorporated 50:50 joint venture which will proceed to develop Marillana.
Outlook for FY19: For FY 19, the company projects the EBITDA to be in the range of $280 million and $320 million. This guidance sets out assumptions including the pricing for lithium and iron ore and production of concentrate at Wodgina. The company had also acknowledged the recent price increase in the benchmark price of iron ore as well as weakening of lithium price. The company also mentioned that, in FY 2019, the EBITDA for its Mining Services would be at least $240 million.
Moreover, for 2H FY 2019, the company expects to achieve steady state operations at Koolyanobbing. It is projected that, in the last quarter of FY19, the company will complete the construction of the Wodgina spodumene concentrate plant, in which currently the company is about to complete construction of first of the three 6% spodumene trains. MIN projects that Mt Marion’s plant upgrade, which is planned to produce all-in 6% concentrate, is expected to be completed in the second half of FY19.
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Capex and Investment Guidance (Source: Company Reports)
Stock Recommendation: Meanwhile, the share price has risen 10.87% over the past three months as at February 26, 2019 and is trading slightly below the average of 52 weeks high and low level of ~$16.5 and has immediate support at $14 and initial resistance around $16.5 level. On the other hand, the company is expected to be aided by the deployments which have been made as the scheduled investments might provide substantial benefits in the long-term. Also, the company plans to make further investments moving forward. Mineral Resources expects a rise in income during 2H FY 2019 and 1H FY 2020 which would give greater borrowing capacity to finance the expansion into Wodgina Hydroxide project and other opportunities. Given the backdrop of aforesaid facts, we have a “Buy” recommendation on the stock at the current market price of A$15.50 per share (down $3.246% on 27 February 2019) while the stock is a fundamentally resilient one and the recent stock price correction seems to be supporting the valuation scenario.
MIN Daily Chart (Source: Thomson Reuters)
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