Australia | Jul 25 2023
This story features MINERAL RESOURCES LIMITED. For more info SHARE ANALYSIS: MIN
For the second time, Mineral Resources and Albemarle have rejigged their lithium joint venture. Brokers weigh the pros and cons of the new arrangement.
-Mineral Resources/Albemarle JV deal rejigged, again
-Deal alleviates balance sheet pressure, while reducing earnings
-Revised deal leaves Mineral Resources without downstream capacity
-Plan is to build downstream capacity in Australia
By Greg Peel
As brokers note, Mineral Resources’ ((MIN)) downstream lithium strategy is a fluid one. After already tweaking its MARBL joint venture with Albemarle once, the arrangement has again been upended.
In simple terms, Mineral Resources will no longer invest in downstream lithium conversion capacity in China, preferring to go it alone with a facility in Australia it has yet to build.
Unless management changes its mind again.
In not so simple terms, it’s complicated.
Previously Mineral Resources had planned to take its joint venture stake in the Kemerton lithium hydroxide facility in WA from 40% to 15%, but now it will divest the asset completely. Previously, the company had planned to invest heavily in 50% stakes in the Quinzhou and Meishan refineries in China, but now it won’t.
In return, Mineral Resources will increase its stake in the Wodgina mine to 50% from 40%, and become the operator. This will leave the company solely as an upstream spodumene concentrate producer for the time being. Mineral Resources will continue to access Albemarle’s tolling facility for now but brokers seem unsure for exactly how much longer. When the arrangement ends, the company could sell its product to third parties in the mean time.
Mineral Resources’ goal of becoming a fully integrated up/downstream producer for the growing battery market remains in place, but the company wants to achieve that in Australia, cutting ties with China.
The major benefit of this latest MARBL deal is that Mineral Resources will not longer be forking out -US$660m for the two Chinese refineries, but instead will be receiving US$380-400m from Albemarle from the sale of its Kemerton stake. While the company is left without downstream capacity, the biggest concern for brokers had been the amount of debt on the company's balance sheet, and how much more would be required.
Those concerns have now been alleviated. The offset is loss of earnings from Kemerton, but brokers agree it’s a win on a net basis, despite resulting in lower near-term earnings forecasts and reduced target prices.
For now. The next step is to build a downstream facility in Australia, which will not be cheap – more costly than China – and it will take years to construct.
While brokers agree the new deal is positive for Mineral Resources, there is little agreement on the stock as an investment prospect from here. Bear in mind the company also mines iron ore and provides mining services, on top of its lithium aspirations.
In the latter case, the WA government has approved construction of a haul road to the company's Onslow iron ore project, which represents a key de-risking step.
Bell Potter notes Mineral Resources’ lithium and iron ore businesses are undergoing considerable development and expansion. Resulting production growth is forecast to increase earnings over the forecast period and provide excellent leverage to growing lithium demand. The lithium business has significant expansion potential the broker is yet to ascribe full value to.
Bell Potter has a Buy rating and $93 target.
Macquarie also has a Buy rating, and tops the brokers monitored daily by FNArena with a $100 target. The decision to exit Kemerton is considered a key positive, as the cash received will significantly alleviate any near-term balance sheet concerns.
Citi sits in the middle on Neutral. There’s been a lot of twists and turns in Mineral Resources’ lithium strategy, but overall the broker believes the MARBL news is positive as it reduces jurisdictional risk (China), removes balance sheet concerns, gives the company time to decide if constructing/operating a downstream plant is necessarily what’s best, and the disposal of non-integrated Kemerton simplifies the business.
Citi has a $76.00 target.
Morgan Stanley is also on the fence with Equal-weight. The broker sees the MARBL announcement improving Mineral Resources’ leverage position moving forward. But the departure from downstream partnership with Albemarle leaves the company without downstream integration and exposure, which is less favourable.
Morgan Stanley has a $70 target.
UBS retains Sell. The broker notes Mineral Resources is in a heavy capex program, with free cash flow not set to break even for two years, and is subject to inflation and delay. UBS would like to see clarity on a the lithium chemicals downstream strategy, and has a $63 target.
Not monitored daily, Goldman Sachs maintains a Sell rating noting Mineral Resources is fully valued versus peers and sees downside risk to its revised target price of $57.
Given the uncertainty of how Mineral Resources will approach a downstream facility project in Australia, or even if, Jarden (also not monitored daily) feels it more appropriate to revert to valuing the company as simply a spodumene concentrate merchant in the meantime. Jarden retains Underweight, with a $53.53 target.
That puts the target range between brokers noted above at $53.53 to $100. Among them there are two Buys, two Holds and two Sells, reflecting a balance between longer and shorter terms views.
Among brokers monitored daily, there are three Buys, three Holds and one Sell, but Morgans and Ord Minnett are yet to update their views. The average target between the seven brokers is $81.00 currently.
Tomorrow, Mineral Resources will report its June quarter sales and production numbers, and on August 29, its FY23 earnings result. Brokers will be hoping for an update on just how management intends to progress from here.
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