EUR 850.00 For Business Accounts Only

Morningstar | Albemarle Deal Monetises and Derisks Lithium for Mineral Resources. FVE Upgraded to AUD 20.

We increase our fair value estimate for no-moat Mineral Resources by 55% to AUD 20 per share from AUD 12.85 previously. The key driver is the likely cash purchase by Albemarle Corp of a 50% stake in the Wodgina lithium project for USD 1.15 billion. Grossed up this is more than 70% above the fair value we’d ascribed. Other fair value lifters include a 30% increase in our midcycle lithium price forecast to USD 12,855 per tonne in 2025 dollars, near-term commodity price upgrades for bulks in the order of 5%-12%, and time value of money. At around AUD 15.50, Mineral Resources shares have pulled-back by a third from AUD 22 January highs, and in combination with the increase in our fair value estimate, now trade at a 23% discount to fair value. We stress fair value uncertainty is very high, with Mineral Resources' earnings highly dependent upon volatile lithium and iron ore prices, both directly via sales and indirectly via the provision of services to lithium and iron ore mining companies. Mineral Resources' iron ore production is high cost and leveraged to the iron ore price. A key catalyst for price convergence to fair value could be consummation of the Albemarle deal before the agreed Dec. 14 deadline.

At this stage, the Albemarle deal remains strictly an exclusivity agreement for a potential sale. It follows a global sale process for Wodgina underway since May 2018. However, we think the likelihood of no deal occurring is sufficiently low to credit the full value of Albemarle’s cash offer; terms have been disclosed and there is unlikely to be regulatory impediment. If no deal arises, our fair value estimate will fall back to AUD 13.50, a decline of 20% all else equal. This includes discounting construction of a lithium hydroxide plant. Formalising the Albemarle deal materially increases the likelihood of this stage reaching reality, given Albemarle’s expertise and Mineral Resources’ enhanced cash position and reduced capital expenditure commitment.

Mineral Resources and Albemarle propose to jointly manage Wodgina, though Mineral Resources will retain the build, own, operate crushing contract and the mine to ship haulage contract, in accordance with its overarching business strategy--that being to acquire ownership/joint ownership of undeveloped ore bodies, fund the mine design and development, and secure the life-of-mine contract for full pit-to-end customer services.
While evaporation of brines in Chile makes up approximately 80% of Albemarle’s lithium profits, it does have a 49% joint venture, or JV, interest in Talison’s hard-rock operations in Greenbushes, Western Australia. The operation produces spodumene which is then directly converted into lithium hydroxide, relevant experience for plans at Wodgina.

The Wodgina JV is expected to produce up to 750Ktpa of 6% spodumene concentrate which is ultimately intended to be used as feedstock for a company-owned lithium hydroxide plant. Our fair value credits the full 750ktpa of concentrate capacity in addition to later hydroxide capacity which could produce at a rate of 100ktpa though coming at an estimated cost in the vicinity of AUD 800 million. Wodgina is the largest known hard rock lithium deposit in the world, and construction began in March 2018, to be delivered in three 250ktpa trains. Train one and two are to be operational by fourth-quarter fiscal 2019 and train three in first-quarter fiscal 2020. These are expected to operate in the lowest-cost quartile for spodumene globally. Spodumene is an important source of lithium which is extracted by fusing in acid. It is a higher-cost source of lithium than brines, but is a low-cost source of lithium hydroxide, appropriate for batteries, because lithium hydroxide can be produced directly from spodumene. Brines must produce lithium carbonate first. Brines account for approximately 87% of global lithium production.

Our group fair value estimate equates to a fiscal 2023 EV/EBITDA of 6.3, a P/E of 12 and dividend yield of 4.1%, all discounted at WACC. Versus today’s fair value estimate, 2023 P/E and yield are 7.0 and 7.1%, respectively. Rebalanced for the Wodgina sale, our fair value estimate breaks-down to 40% for mining services & processing (predominantly crushing), and 60% for mining of which the vast majority is for lithium products.