Global Lithium Spotlight Falls On Wodgina

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Wodgina, the hard rock lithium project, has found the global spotlight as Mineral Resources announces a JV proposal from Albemarle.

-JV plans to develop lithium hydroxide production at Wodgina
-Fully unrisked the proposal offers around 90% of Morgan Stanley's valuation
-FY19 earnings guidance below forecasts
 

By Eva Brocklehurst

Mineral Resources ((MIN)) has sparked considerable interest, announcing a joint venture proposal from Albemarle. The deal pushes the Wodgina hard rock lithium project into the global spotlight.

Albemarle is offering US$1.15bn for 50% of a joint venture at Wodgina, in the north west of Western Australia. The JV will own and operate the mine and develop an integrated lithium hydroxide operation on-site. The deal could close mid-December.

Mineral Resources had flagged a sell-down of Wodgina in May, but initially aimed for a 49% sale, without infrastructure, in order to maintain control of the asset. It appears, at first blush, this deal will include the associated infrastructure and joint ownership and operator status. Regardless, Morgan Stanley believes a deal with Albemarle enhances the credibility of Wodgina and supports the continued relevance of hard rock lithium in the future.

Deutsche Bank values the combined asset at $2.0bn and, reading through the deal, calculates the valuation at $3.17bn (based on an AUD value of US73c), 57% above its valuation. Yet the broker has only been factoring in 56,000tpa of the proposed 113,000tpa hydroxide facility, given the early nature of the strategy downstream.

Albemarle intends to produce at least 100,000tpa, which Deutsche Bank suggests is an indication it may replicate the design of the proposed Kemerton facility.

The broker upgrades Mineral Resources to Buy on valuation and believes there are implications for spodumene, hydroxide and the structure of the lithium market following this deal. The deal bodes well for an Overweight call on the stock, Morgan Stanley agrees.

The broker includes $8.30 per share in its current target of $20 for Wodgina upstream and $2.20 per share for downstream processing. Albemarle has offered an enterprise value equating to $17 a share for Wodgina in the deal, on the broker's calculation.

Even on a fully unrisked basis the value offered is around 90% of the valuation, Morgan Stanley assesses, a significant feature, particularly considering the project has not yet commenced production upstream or constructed the downstream facility.

Ord Minnett had valued Wodgina at $2.3bn, or US$1.64bn, but this included only 50,000tpa of lithium hydroxide capacity, not the 100,000tpa target which has been flagged. Adding another 50,000tpa of downstream capacity lifts the broker's valuation in line with the agreed price. Ord Minnett suggests the deal is clean, and fair, noting both parties plan for binding documents by December 14.

Albemarle

Albemarle Corp is based and listed in the US, supplying specialty chemicals globally and producing lithium carbonate at La Negra, Chile, and in Nevada, US. The company produces lithium hydroxide technical grade in the US and Germany with a plant in the US and two in China.

By this partnership, Mineral Resources has cemented Wodgina as a tier-1 strategic asset and placed the downstream option firmly on the table, in Ord Minnett's estimation. Not only does the transaction deliver a cash windfall, it also confirms the strategic value of the upstream lithium assets, which can be developed into long-term, ex-China, sources of battery-grade lithium.

Albemarle should bring significant intellectual property and engineering expertise to the JV. The construction of a 50,000tpa lithium hydroxide facility will begin as soon as necessary licenses and approvals are in place and a second stage will be subject to market conditions but would add another 50,000tpa of capacity and consume all of the concentrate output from Wodgina.

Earnings Guidance

Mineral Resources also released FY19 earnings guidance at its recent AGM, which was below both Morgan Stanley's and Macquarie's forecasts. Group guidance is $280-320m versus Macquarie's estimate of $520m. Mining service guidance is 80-85% of the total, also lower than both brokers expected.

The variation, overall, stems from reduced shipment guidance, as Mount Marion is expected to ship -17% less spodumene than Macquarie had forecast, while spodumene shipments from Wodgina are in line with estimates. DSO shipments have ceased, but Macquarie had assumed a further 220,000t in the second quarter of FY19. Iron ore shipments are broadly in line with expectations, as lower volumes at Iron Valley are offset by higher outcomes forecast for Koolyanobbing.

Mining services guidance missed expectations because of wider discounting in iron ore fines, higher operating costs at Mount Marion and higher start-up costs at Koolyanobbing.

FNArena's database shows three Buy ratings for Mineral Resources (Macquarie is restricted on rating and target). The consensus target is $19.83, suggesting 28.2% upside to the last share price. This compares with $17.83 ahead of the announcement. The dividend yield on FY19 and FY20 forecasts is 3.7% and 5.1% respectively.

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