Mineral Resources Limited

MIN Details

Mineral Resources Limited (ASX: MIN) operates as a mining services company with a portfolio of iron ore and lithium assets in Iron Valley, Koolyanobbing and Wodgina. Besides, the company also owns a commodity portfolio in the Yilgarn region in Western Australia. MIN provides open pit mining, crushing, processing, supply chain services, port operations, and site services.

New Business Developments:

• On 14^th December 2021, MIN forged a JV with Pantora Limited and Tulla Resources Limited to explore and develop lithium deposits in the Norseman Gold Project. In conjunction, MIN is expected to spend a minimum A$500k expenditure within six months and a further A$2.50 million within 18 months.
• On 13^th December 2021, MIN’s JV company, Reed Advanced Materials Pty. Ltd. has entered into a co-operation agreement with Portugal-based chemical producer Bondalti Chemicals S.A. This coalition was formed to construct and operate a lithium refinery at Bondalti’s extensive chlor-alkali operations in Portugal. The project is targeted to complete by June 30, 2023, with a shared cost estimate of US$4 million.
• On 29^th November 2021, MIN entered into a pact with Hancock Prospecting Pty Limited and Roy Hill Holdings Pty Limited to jointly develop a new iron ore facility at the port of Hedland in Southwest Creek with the scope of the project including rail haulage and port services.

Q1FY22 Exploration Update:

• Iron ore shipments and production reached over 5.0 million during the quarter, in line with the prior quarter and a 40% jump on a YoY basis. Mining services volume soared 7% on QoQ and 22% on a YoY basis.
• Spodumene shipments nosedived 13% over Q4FY21 to reach 99,536 dmt as shipments were delayed to the second quarter of FY22.
• Iron ore realization settled at US$78.32 per dmt, affected by lower September Platts price and negative adjustments of US$33.8 million towards finalization of FY21 shipments.
• MIN witnessed a significant gas discovery at the Lockyer Deep-1 project.
• It had completed the acquisition of Red Hill Iron Limited’s 40% interest in the Red Hill Iron Ore JV in the West Pilbara region.

A Quick Review on FY21 Performance:

Revenue surged 76% to reach A$3.73 billion in FY21, driven by record commodities shipments and strong iron ore pricing. But underlying EBITDA margin dived to 36% as compared to 51% in PcP owing to an increase in royalties and shipping costs. It had closed the fiscal year with a cash balance of A$1.54 billion and debt of A$1.26 billion.

Rising Cash (Source: Analysis by Kalkine Group)

Key Risks: MIN is exposed to changes in spodumene prices affecting realization and margin of lithium. Changes in demand from China alters iron ore shipment volumes. During FY21, its underlying EBITDA margin was impacted by the pandemic-led supply chain disruptions and increase in shipping and haulage costs. A slowdown in industrialization across the globe on the back of the new virus variant may influence the demand offtake and may trim the topline growth.

Outlook: Construction of Kemerton Lithium Hydroxide plant near Bunbury is progressing well and is expected to hit production by mid-2022. MIN commenced a 1.5MW solar and battery project at the Wonmunna site. It is expected to produce ~30% of the site’s installed power requirements and cut diesel consumption by 600,000 litres p.a. MIN is progressing on gas production test at Lockyer Deep-1, to be completed by Q1 of CY22. MIN is targeting iron ore shipments to reach 21-22 mtpa by FY22.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last nine months, the stock delivered returns of ~48.62%. It is trading above to the average of the 52-week low-high band of $33.33-$65.38. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation and arrived at a target price with a downside of low single-digit (in percentage terms). The company can trade at a slight premium to its peers’ median EV/Sales multiple, considering the improved shipments in Q1FY22 and various joint venture arrangements. For the valuation purpose, peers such as Western Areas Ltd. (ASX: WSA), Pilbara Minerals Ltd. (ASX: PLS), BHP Group Ltd. (ASX: BHP), and others have been considered. Considering the rally in share price in recent periods, downside indicated by the valuation, fluctuations in spodumene prices, and key associated business risks, we suggest investors to “Sell” and book profit on the stock at the closing market price of $54.99, up ~3.384% as on 24 December 2021.

MIN Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

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