Australia | Nov 21 2016
Mineral processor and iron ore and lithium miner Mineral Resources’ AGM revealed so much opportunity one broker was prompted to upgrade to Buy.
– Increased iron ore production and crushing capacity
– Wodgina lithium moving fast
– Mt Marion lithium soon to reach full production
– Earnings guidance upgraded
By Greg Peel
Mineral Resources acquired the Wodgina lithium-tantalum project from Global Advanced Metals mid this year for what Deutsche Bank describes as a “small price”. The broker calculates it should cost the company around $50-70m to move to first lithium production and values the 100%-owned asset at $584m, or $3.12 per share.
Construction has already begun at Wodgina and first production is expected around March 2018 – around three months earlier than Deutsche had assumed. The design will be similar to that of Mineral Resources’ 43%-owned Mt Marion lithium project. Mt Marion is expected to be in full production by the end of this year.
The Wodgina news was a highlight of last week’s AGM but one might argue the meeting was a highlight-only affair.
Mt Marion is expected to be in full lithium production by the end of this year. Iron ore shipments are expected to increase slightly in FY17 and grow by 20% in each of FY18 and FY19. The company has added two new crushing contracts to take capacity up to 100mt, following an 11% capacity increase in FY16. Two or three new profit-sharing projects will likely commence in 2017.
For the mineral processor (crushing) and iron ore and lithium miner, any one of these projects has the potential to be a material share price driver, Macquarie suggests. On the broker’s forecasts the company will have around $250m in net cash by end-FY17 and therefore has the balance sheet strength to take several on simultaneously.
And that’s before Mineral Resources divests itself of its Mt Marion stake, as is the plan, while retaining the services contract, and sells down part of Wodgina.
FY17 earnings guidance was upgraded at the AGM by 5% to $380-420m. This assumes 12.5mt of iron ore sold at US$60/t (current price US$72.60/t), an exchange rate of US75c (currently 73.3c), 100mt of crushing capacity and Mt Marion in production by end-FY17.
Mineral Resources has a strong track record of being able to prosecute its opportunities for the benefit of shareholders, Macquarie notes. With so many opportunities and catalysts currently presenting, the broker has decided to upgrade to Buy (Outperform).
At the beginning of 2016, Mineral Resources was one of the most heavily shorted stocks on the ASX. The market was focused heavily on the company’s iron ore production business and a tumbling iron ore price, ignoring the reliable and recurring earnings available from the company’s crushing and services businesses. While the pure-play iron ore miners were bleeding, analysts saw the possibility of Mineral Resources being able to make opportunistic acquisitions.
What no one was considering was lithium – the high-flying metal of 2016.
Mineral Resources’ share price bottomed out in January at around $3.50 and is currently at around $12.30. Deutsche Bank’s FY17 earnings forecast is already at the top end of guidance but FY18 and beyond have been increased to account for an accelerated Wodgina. Yet the broker can still only arrive at an $11.80 target, and hence a Hold rating is retained.
Macquarie has lifted its target from a prior $11.70 to US$13.37, justifying the upgrade.
Ord Minnett (Buy) had already set a target of $13.50 back at the August earnings result release while a more conservative Morgan Stanley (Equal-weight) is still sitting on $11.10, albeit both have yet to update since the AGM.
This leaves Mineral Resources with two Buys and two Holds or equivalent on the FNArena database for a consensus target of $12.44.
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