EUR 850.00 For Business Accounts Only

Morningstar | Mineral Resources Meets 1H Target. But the Wait for Albemarle Cash Overshadows.

We make no change to our AUD 20 per share fair value estimate for no-moat Mineral Resources. The company reported first-half underlying NPAT of AUD 34 million, down 74% on the previous corresponding period, but close to our AUD 35.8 million expectations. That said, lower-than-anticipated depreciation flattered the result. Negative net operating cash flow of AUD 64 million disappointed, reflecting cessation of direct shipping ore from Wodgina lithium in preference for later value added spodumene concentrate sales, delay in completion of the acquisition of Koolyanobbing iron ore, and reduced realised average iron ore prices due to ongoing quality discounts. The point is made somewhat moot given the development phase of the business, and anticipated receipt of USD 1.15 billion in cash from Albemarle Corp for sale of a 50% interest in the Wodgina lithium project. Completion of the Wodgina sale will result in the company moving back into a net cash position versus negative AUD 653 million at end December, down from net debt neutral levels a year ago.

We still anticipate a stronger second half and our fiscal 2019 underlying EPS estimate is unchanged at AUD 0.57 versus the first half’s AUD 0.18 print. However, lower depreciation is an insulating factor. Mineral Resources has not changed fiscal 2019 guidance for AUD 280-320 million in EBITDA. But we become more circumspect and reduce to a below low-end AUD 265 million from our prior AUD 300 million plus position. Recent weakening in lithium prices deserves consideration.

Mineral Resources shares have strengthened since first announcement of the exclusivity agreement with Albemarle in late November. At AUD 16.85, they trade at a near-15% discount to fair value. A key potential catalyst for price convergence to fair value is receipt of all approvals necessary for the Albemarle deal to proceed. We don’t foresee regulatory impediment. But if no deal arises, our fair value estimate will fall back to AUD 13.50 per share.

For those anticipating a capital return, the company says none is contemplated. Cash will be required to part fund expansion into the Wodgina Hydroxide project.

Our group fair value estimate equates to a fiscal 2023 EV/EBITDA of 6.7, a P/E of 13 and dividend yield of 4.1%, all discounted at WACC. Versus today’s fair value estimate, 2023 P/E and yield are 7.3 and 7.3%, respectively. Our fair value credits the full 750ktpa of concentrate capacity in addition to later hydroxide capacity which we forecast to produce at a rate of 100ktpa though coming at an estimated cost in the vicinity of AUD 800 million. 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. Mining, predominantly lithium and including anticipated Albermarle cash, comprises approximately 65% of our fair value estimate with Mining Services and Processing the balance.

Mineral Resources anticipates a second half doubling in mining services EBITDA to AUD 151-171 million as contracts continue to ramp up at three sites. Koolyanobbing iron ore is on schedule to achieve steady state operations in second-half fiscal 2019 following the first half’s ramp-up. Lithium will also tick-up with mobilisation to Wodgina for startup and ramp-up of spodumene output to 750,000 tonne nameplate capacity, and ongoing commissioning and ramp-up to 450,000 tonne spodumene nameplate capacity at Mt Marion.

The company declared an AUD 13 cent interim dividend, ahead of expectations on a high 72% payout ratio, though still to modest 1.5% fully franked annualised yield.