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.


MIN Details

Deployments Made To Support MIN’s Long-term Growth: Mineral Resources Limited (ASX: MIN) is a leading mining services provider with the market capitalisation of $3.19 billion as of 17 April 2019. The company is principally engaged in the integrated supply of goods and services to the resources sector. It earlier released its results for the half year ended December 31, 2018 (or 1H FY 2019) in which its EBITDA stood at $72 million, broadly in line with the guidance after unrealised accounting loss with respect to investment in Pilbara Minerals Limited amounting to $30 million. The company’s normalised EBITDA, after adding the unrealised loss, amounted to $102 million. After income tax and non-controlling interest, the profits of the company stood at $13 million. Moreover, the FY19 EBITDA guidance given in its AGM on November 2018 was suggested in the range of A$280 million - A$320 million, with 35% weighted towards 1H and 65% to 2H of FY19. The company generated revenues amounting to $554.7 million reflecting a fall of 35% on pcp while reported EBITDA fell by 80% on pcp basis. These decreases were mainly on account of the decision to cease Wodgina lithium Direct Shipping Ore (or DSO) sales in favour of the extraction of higher value via spodumene concentrate in the future periods which impacted Mining Services and Commodity margins and the delay in completion of Koolyanobbing acquisition and start-up prevented the continuity of Yilgarn operations after cessation at Carina. However, the fall in average realised price for Iron Valley iron ore products and higher logistics & shipping costs were also the main reasons which weighed over revenue and EBITDA. Further, the company is expected to be helped by the investments towards the projects and improving cash-generating capabilities. Also, the programme of investment would be continued in the 2H FY 2019 as Mineral Resources completes major projects at Wodgina and Mt Marion. This prudent deployment towards its projects can set the growth trajectory in the future.
 

1H FY 2019 Performance (Source: Company Reports)

MIN Delivered on Numerous Major Initiatives: In 1H FY19, the company delivered on numerous major initiatives which primarily includes (1) execution of transaction with Albemarle Corporation to unload 50% of Wodgina Lithium Project for the consideration of US$1.15 billion and, after completion, to establish 50:50 joint venture, (2) acquisition of additional equity in Mt Marion and, as a result of which, MRL’s stake stands at 50%, (3) wrapping up of Koolyanobbing Iron Ore Project acquisition, enabling operations in Yilgarn region to continue, (4) strategic acquisition of Kumina Iron Ore Project in Pilbara. Apart from these, the company also incurred expenditure amounting to around $400 million towards the construction of lithium mining and processing facilities at Wodgina and Mt Marion. We expect that these developments would be supporting the company moving forward in achieving the long-term growth prospects and places the company in a better position to tackle the short-term challenges.

Decent Financial Position: The net margin of Mineral Resources stood at 16.7% at the end of FY 2018 which is higher than the industry median of 13.2%, reflecting better capability to convert its top line into the bottom line as compared to its peer group. Also, the company’s cash generating capabilities have been improving from the past 2 years to FY 2018 (i.e. in FY 2017 and FY 2018) which could assist it in levelling up the cash levels thus, placing it in an improved position to make strategic investments. However, the company’s net margin stood at 2.4% in 1H FY 2019.

At the end of 1H FY 2019, the company was having cash and undrawn cash debt facilities amounting to $251 million which can be considered at decent levels considering the investments made across strategically important projects. We expect that improving cash-generating capabilities coupled with deployments towards the projects can prepare the company to witness long-term and sustainable growth.

Pricing of Senior Unsecured Notes: Mineral Resources made an announcement of pricing of US$700 million 8.125% senior unsecured notes due 2027 in an offering to the persons which are reasonably believed to be the qualified institutional buyers and to certain persons outside the US in offshore transactions. The settlement of offering of notes is anticipated to occur on April 23, 2019, subject to the customary closing conditions. There are expectations that the company would be utilising net cash proceeds from the offering towards refinancing certain existing credit facilities as well as for the general corporate purposes (including the capital expenditures).

The notes would be paying interest on May 1 and November 1 each year and would start on November 1, 2019, at the rate of 8.125% p.a. The notes would be guaranteed by the certain wholly-owned subsidiaries of Mineral Resources Limited.

Purchase of Additional Mt Marion Equity: Mineral Resources has made an announcement that it has wrapped up the purchase of additional equity in Mt Marion Lithium Project in WA’s Goldfields. After receipt of the relevant approvals and the payment by Mineral Resources amounting to A$51.9 million to the Neometals, MIN’s subsidiary named Process Minerals International Pty Ltd had increased the equity interest in Mt Marion to 50% from 43.1%. This acquisition is in line with MIN’s strategy of identifying value-adding opportunities in the lithium sector.

A Look at MIN’s Cash Flow Position: Mineral Resources Limited’s net cash from operations witnessed a decline and stood at $21.6 million which implies a 90% fall on pcp basis reflecting the development phase of the business. The working capital outflow of $80.4 million was because of the commencement of Koolyanobbing operations which led to the build-up of inventory levels and receivables net of payables and higher inventories related to Mount Marion and Wodgina mining operations. The growth and investment capital expenditure amounting to $468.2 million in H1 FY 2019 consists of Wodgina spodumene concentrate plant and related infrastructure construction, Mt Marion beneficiation plant upgrades and related infrastructure and the acquisition of Kumina tenements. We expect that the recent developments would help the company in achieving the strategic business objectives which might attract the market players attention. As at 31 December 2018, the current ratio stood at 1.41x with a debt-to-equity ratio of 0.65x, showing a decent liquidity position.
 

Cash Flow (Source: Company Reports)

What To Expect From Mineral Resources Moving Forward: Mineral Resources Limited happens to be on track to deliver forecasted EBITDA based on the assumptions (including commodity pricing) made at the time of the guidance at November 2018 AGM of between $280 million- $320 million. Mineral Resources had affirmed the guidance for the Mining Services Division and there are expectations that it would contribute a minimum $240 million of EBITDA. The inventory witnessed a rise of $42.3 million primarily because of the ramp-up of Koolyanobbing project with stockpiling of iron ore prior to the first shipment in the month of December 2018. In addition to the cash holdings of $136 million, Mineral Resources had in excess of $125 million of the undrawn debt facilities so that business development activities can be supported, and this witnessed a rise to $325 million with an additional $200 million working capital facility being made available by banking syndicate in the month of January 2019. For the Mining Services, the company is expected to ramp up to the full mining operations at Koolyanobbing and plans to mobilise to Wodgina for mine start-up in the 2H FY 2019. For the same period, the company plans to complete construction and commence commissioning at Wodgina. Additionally, for 2HFY19, the company intends to complete commissioning, ramp up to nameplate capacity and upgrade bore fields & workshop at Mt Marion. There are expectations that gearing would be increasing in H2 FY 2019 with further capital investment as long-term growth projects, including Wodgina, Mt Marion and Kumina, are ramping up.
 

Balance Sheet (Source: Company Reports)

Stock Recommendation: In the span of the previous six months, the stock of Mineral Resources Limited has witnessed a rise of 6.06% and, in the past three months, the returns stood at 5.73%. It represents that the company has generated decent returns over the said period. Despite the prudent investment, the company declared interim dividend amounting to 13 cents per share (fully franked) in 1H FY 2019 and expect that the company will continue to share its profits among investors. From the valuation perspective, the company’s stock is looking quite attractive as its P/E ratio stood at 26.030x which is lower than the peer median of 27.97x reflecting that the stock is slightly undervalued and, thus, providing a decent opportunity at the current level. Further, the company’s management had stated that the financial results for 1H FY 2019 demonstrate the strategic decision to deploy towards the number of longer-term growth projects which would be helping the company in maximising the value of the lithium ore bodies. Moreover, infrastructure and innovation initiatives which the company has been developing over the past 3 to 5 years will provide additional, industry-changing mining services capability that might act as a tailwind for the company in the long run. This equates that the company possesses decent fundamentals. Hence, considering the aforesaid facts and current trading level, we give a “Buy” recommendation on the stock at the current market price of A$16.390 per share (down 3.418% on April 17, 2019).

 
MIN Daily Chart (Source: Thomson Reuters)

 
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