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

Exposure to Iron Ore Prices Might Provide Short-Term Support: Mineral Resources Limited (ASX: MIN) is an ASX listed multi-business company, whose core business pillars include Mining Services, Commodities, Profit-Share Projects, Innovation & Infrastructure, and Energy. The market capitalisation of Mineral Resources Limited stood at ~A$2.89 billion as on July 10, 2019. Under the roof of mining services, the company provides service such as Crushing, Processing, Road and Rail Bulk Haulage, Camp Services, and Marketing & Shipping Services. Under the commodities segment, MIN holds exposure to Lithium, Iron ore, and Graphite. MIN’s iron ore shipments have witnessed the rise of 41 per cent to 3.3Mt in Q3 FY 2019 when compared to Q2 FY 2019 because of the successful ramp-up of Koolyanobbing. MIN witnessed a growth of over 18% in shipments of spodumene ore from Mt Marion in the Q3 FY 2019 as compared to Q2 FY 2019. However, lithium prices are trending down in the current scenario. On the other hand, the exposure to iron ore prices could provide the company support in near to medium term; while the exposure to spodumene could still provide a long-term support. The iron ore prices rose significantly to reach multiyear high in the recent month, which in turn, could boost the balance sheet of the company in terms of high realised price of the commodity. The iron ore prices are further projected to increase amid the anticipated shortfall in the Australian supply chain over the short-term.


World Iron Ore Trade (Source: Department of Industry, Innovation and Science)

Top 10 Shareholders: The following table gives a broad overview of the top 10 shareholders of Mineral Resources Limited:

Top 10 Shareholders (Source: Thomson Reuters)

Decent Margin Standing Strengthens Confidence in Future Performance: MIN’s gross margin stood at 96.7% in FY 2018, while the industry median stands at 40.5%, which can be considered at decent levels. The net margin for FY 2018 stands at 16.7%, which is also above the industry median of 14.0%. The high net margin as compared to the industry median suggests that MIN has a better capability to convert its top line into the bottom line as compared to the broader industry. However, the 1H FY 2019 gross margin stands at 95.9% against the industry median of 41.6%, while the net margin for 1H FY19 of the company stands at 2.4%. On the liquidity front, current ratio and quick ratio for 1HFY19 stand at 1.41x and 0.94x, respectively. Debt to equity ratio stands at 0.65x in 1HFY19.


Key Metrics (Source: Thomson Reuters)

Profit Share Projects To Support MIN’s Future: Mineral Resources Limited has four profit share projects, and it has taken an equity position in the ore body. The Joint Ventures or the Profit Share Projects would ensure that the company’s work would remain streamlined till the JV runs out the life-of-mine.


Profit Share Model (Source: Company Reports)

Overview of March 2019 Quarter Results: Mineral Resources Limited had stated that it had continued the evaluation of various options with regards to exploration permits EP 368 and EP 389 during the quarter ended March 2019. MIN delivered 297kwmt (wet metric tonnes) of spodumene concentrate from Mt Marion till March 2019, and out of total 297k, 213kt tonnes were 6% graded, for which the company realised the price of A$1,328.13/wmt, and 84kt remained 4% graded for which MIN realised a price of A$791.78/wmt. The average cost per wet metric tonne shipped stood at A$596.80 including cost freight rate.

MIN shipped 1.8m wmt of iron ore from its Koolyanobbing prospect in Q3 FY19 with an average realised price of A$95.89 per wmt, and the Cost and Freight (CFR) shipping cost stood at A$75.76 on per wmt shipped. Likewise, MIN shipped 5.5mwmt of iron ore in Q3 FY19 from its Iron Valley prospect and realised an average price of A$67.83 per wmt with the CFR shipment cost of A$65.60 per wmt. The following picture provides a broad overview:

 
YTD achievement of commodity business (Source: Company Reports)

Resignation of Non-Executive Director: Mineral Resources Limited had noted that Non-Executive Director named Mr. Tim Roberts had resigned from the company’s Board with effect from June 5, 2019. However, it was also mentioned that Mr. Roberts had confirmed that he would be the supportive shareholder of the company and he has no current intention to dispose of his shareholding. 

Announcement About Mt Marion 6% Spodumene Concentrate Pricing: Mineral Resources Limited, on behalf of Reed Industrial Metals Pty Ltd which owns and operates the Mt Marion Lithium Project, had advised that sale price for 6% spodumene concentrate shipments for June 2019 quarter would be US$682.38 per dry metric tonne, as compared to $US791.84 per dmt for March 2019 quarter. Additionally, it was mentioned that Mt Marion happens to be a profitable and highly valuable long-life lithium asset for Mineral Resources.

Mt Marion holds the potential to offset the weak prices in terms of higher sales volume over the short as well as long-term. The dual exposure is likely to provide the investors with a smooth ride and sustainability.
 
Completion of Senior Unsecured Notes Offering: Mineral Resources Limited had made an announcement that they have wrapped up the announced offering of US$700 million in aggregate principal amount of its 8.125% senior unsecured notes due 2027 in an offering. The portion of net cash proceeds of the Notes offering would be utilised towards the refinancing of certain of the company’s existing credit facilities. Additionally, it was stated that any remaining net cash proceeds would be utilised for the general corporate purposes (which includes capital expenditures).


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodologies:

Method 1: EV/Sales Multiple Approach

EV/Sales Multiple Approach (Source: Thomson Reuters), *NTM: Next Twelve Months

Method 2: EV/EBITDA Multiple Approach

EV/EBITDA Multiple Approach (Source: Thomson Reuters), *NTM: Next Twelve Months

(Note: All forecasted figures and peers have been taken from Thomson Reuters)

What to Expect From MIN Moving Forward: Mineral Resources Limited had advised that FY19 earnings before interest, tax, depreciation and amortisation (or EBITDA) at the consolidated group level has been anticipated to be in the range of $360 million to $390 million. This has been predicated considering various assumptions and major assumptions include the spodumene concentrate price of US$682.38 per tonne (6%), CFR 62% Fe of US$83.89 per tonne as well as the AUD/USD of 0.723 cents. The company’s core business pillars are mining services, commodities, profit share projects as well as innovation & infrastructure.
The company’s competitive advantages include speed to market, reduced capital intensity, lower cost of production, largest inventory of parts and consumables as well as culture of innovation. Also, the company happens to be a global leader in the design and technology development. Coming to the future outlook (for the next twelve months), with respect to mining services, the company is expecting further growth which might be greater than 20% in the external crushing business.

Stock Recommendation: The stock price of Mineral Resources Limited has delivered the return of 2.61% on the YTD basis, while in the span of previous one month, the return was 7.34% which can be considered at respectable levels. The company stated that its innovation strategy enables it to develop and offer unique mining products and services with the high entry barriers and it also helps in increasing the value-add proposition to the clients. Additionally, the innovation strategy provides the competitive advantage and sustainably delivers the long-term project horizon with respect to the mining services business. In the Macquarie Australia Conference 2019, the company also stated that the completion of Albemarle transaction during CY 2019 would be returning the balance sheet to the net cash position as well as a significant cash balance.

In the time from FY 2015- FY 2018, the company’s total have witnessed a CAGR growth of 7.73% that can be considered at respectable levels and, thus, it looks like that the company is possessing decent capabilities to generate the revenues which might support its financial numbers moving forward. However, in the time frame from FY 2014- FY 2018, MIN’s bottom line had witnessed the CAGR growth of 4.21%. By looking at decent outlook in the business and aforesaid parameters, we have valued the stock using two relative valuation methods, EV/Sales and EV/EBITDA multiple, and arrived at the target price of the stock in the range of $16.68 to $16.93 (high single digit to low double digit upside (%)). Hence, we give a “Buy” recommendation on the stock at the current market price of A$15.250 per share (down 0.651% on 10 July 2019).
 

MIN Daily Chart (Source: Thomson Reuters)

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