EUR 850.00 For Business Accounts Only

Morningstar | Mineral Resources’ Wodgina Deal With Albemarle Now Binding, Though Regulatory Approvals Remain

We make no change to our AUD 20 per share fair value estimate for no-moat Mineral Resources. The company has now entered into a binding agreement with Albemarle Corp in relation to the sale of a 50% interest in the Wodgina lithium project, previously limited to an exclusivity agreement. The purchase price remains USD 1.15 billion in cash but remains subject to regulatory, Foreign Investment Review Board, and Chinese anti-trust approvals. The parties will jointly manage Wodgina, with Mineral Resources solely responsible for completion of construction of a first-stage 750 ktpa 6% spodumene plant, while the joint venture parties will later be dually responsible for two 50 ktpa battery-grade lithium hydroxide plants. That would sate more than one third of current global lithium demand but in a fast-growing market. Morningstar anticipates demand to continue to grow at near 20% per year, taking total demand equivalent to more than six Wodginas by 2028.

Wodgina is the largest known hard rock lithium deposit in the world, and spodumene plant construction began in March 2018. Trains 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, though not sufficient to support a moat for Mineral Resources business overall. Mineral Resources’ iron ore business is high cost, and contracting work can be canceled.

Narrow-moat Albemarle will sensibly manage the marketing and sales of spodumene concentrate and later lithium hydroxide. Mineral Resources will provide life-of-mine crushing, maintenance, accommodation, airport and mine to port haulage, and ship loading services to the joint venture. The key terms for this servicing agreement are yet to be bedded down, though we foresee no issues on a mutually beneficial arrangement being struck.

Mineral Resources' shares have continued to soften since first announcement of the exclusivity agreement with Albemarle in late November. At AUD 14.30 they trade at a near 30% 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, a decline of 20% all else equal. This includes discounting construction of a lithium hydroxide plant.

Our group fair value estimate equates to a fiscal 2023 EV/EBITDA of 6.3, a PE of 12, and dividend yield of 4.1%, all discounted at WACC. Versus today’s fair value estimate, 2023 PE and yield are 7.0 and 7.1%, respectively. Our fair value estimate credits the full 750 ktpa of concentrate capacity in addition to later hydroxide capacity that we forecast to produce at a rate of 100 ktpa 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.