EUR 850.00 For Business Accounts Only

Morningstar | 4Q Shipments Fall Shy of Production. Mineral Resources FVE Still Increased by 4% to AUD 12.85.

We increase no-moat Mineral Resources' fair value estimate by 4% to AUD 12.85 per share, chiefly due to the time value of money. Our midcycle assumptions are little changed. That's despite a 10% reduction in our fiscal 2018 EPS forecast to AUD 1.18 from AUD 1.32. The EPS downgrade largely reflects inventory build, with combined 6.4 million tonne second-half fiscal 2018 shipments of lithium and iron ore coming in 9% short of 7.0 million tonne production levels. Half-on-half production itself increased 8%, despite production curtailment of Wodgina direct shipping ore, in order to realise maximum future value from the hard-rock lithium deposit. Overall, Mineral Resources more than doubled half-on-half lithium-related production to 2.2 million tonnes, comfortably offsetting the 12% decline in iron ore output to 4.8 million tonnes.

Our fiscal 2019 EPS forecast increases 26% to AUD 1.10, reflecting higher near-term commodity price expectations, including USD 54 per tonne for iron ore from USD 50 prior, at a less onerous AUD/USD exchange rate of 0.75, and the anticipated favourable impact following through to mining services & processing revenue. The latter currently accounts for a minority one-quarter group revenue share, though that share is forecast to decline further still as lithium expansion initiatives continue. Mining services & processing represented 100% of group revenue just six years ago.

Mineral Resources shares have declined 20% from the AUD 21-plus peaks of December 2017, but at AUD 17.20 remain at a material premium to our fair value estimate. A key driver for continued share price depreciation could be commodity price retreat to our less optimistic midcycle forecasts. Benchmark iron ore fines for example have fallen 15% from USD 75 per tonne 2017 highs, but at USD 65 still remain well ahead of our USD 38 midcycle forecast.

Our group fair value estimate equates to an unchanged fiscal 2022 EV/EBITDA of 6.4, a P/E of 14 and dividend yield of 3.5%, all discounted at WACC. In nominal terms, the P/E and yield improve to 8.1 and 6.0%, our yield forecast assuming a 50% payout ratio. Our fair value estimate breaks down to 30% for mining services & processing (predominantly crushing), and 70% for mining of which 90% is for lithium products and the 10% balance largely iron ore. We exclude potential for construction of a lithium carbonate plant at Wodgina given its early stage. If approved, this plant could produce 50,000 tonnes of 99.5% Li2CO3 with expansion potential of up to 100,000 tonnes, worth in the vicinity of AUD 1.0 billion or AUD 5.30 per share. The market is likely already factoring most of this in.

It has been an unhappy acquisition hunting ground for Mineral Resources over the past year. Its initial December 2017 AUD 525 million takeover offer for junior oil and gas company AWE Limited was first trumped by China Energy Reserve and Chemical Group, and then ultimately by Mitsui's winning AUD 602 million bid. And despite a second Mineral Resources' follow-up AUD 280 million April 2018 bid for iron ore miner Atlas Iron being at a substantial 60% premium to the share price, this again didn't stop it from being out-gunned by an ultimately even higher AUD 390 million bid from Hancock Prospecting.

The company did in June successfully acquire Cleveland-Cliffs' Koolyanobbing iron ore operation, including operatorship of Port of Esperance infrastructure, for an undisclosed sum. But this largely just extends useful life of plant and equipment that has been used to operate the adjacent Carina operation since 2011. Shell-shocked, maybe Mineral Resources will have more success on the opposite tack, intending completion of a sale of up to 49% of its Wodgina lithium project by year's end. We value Wodgina at AUD 5.25 per share without the lithium carbonate plant, but if the company gets as good as it's been given lately, there could be meaningful near-term upside to our fair value estimate.