The Downs And Ups Of Mineral Resources

This story features MINERAL RESOURCES LIMITED, and other companies. For more info SHARE ANALYSIS: MIN

Fighting weak lithium and iron ore prices, Mineral Resources’ share price has tanked, but news on an infrastructure sell-down and large gas reserve estimates go some way to righting the ship.

-Mineral Resources hit by weak lithium and iron ore prices
-Production curtailments have followed, but so has a substantial capex increase
-A haul road sell-down and updated gas reserves offer balance sheet relief
-Balance sheet vulnerability remains a central focus

By Greg Peel

Traditional iron ore miner and mining services provider Minerals Resources ((MIN)) has taken on a decidedly more green tinge in recent years, venturing into lithium mining and LNG production. In the latter case, the company’s website states:

“MinRes aims to integrate lower-emission and renewable energy solutions across our operations, including using natural gas to drive the company’s pathway towards a more cost-effective and cleaner energy future,” and “MinRes aims to integrate lower-emission and renewable energy solutions across our operations, including using natural gas to drive the company’s pathway towards a more cost-effective and cleaner energy future”.

In the former case, the rolling collapse in the price of lithium, combined with a more recent slide in the iron ore price, have conspired to send Mineral Resources’ share price down close to -60% since its peak in January 2023.

For lithium, there appears no immediate end in sight. Having already cut its price forecasts, UBS earlier this month cut again, convinced there will soon be more supply coming out of Africa. UBS has a Sell rating on the stock and a target of $41.

Mineral Resources has responded to depressed lithium prices by cutting back production volumes at its Mt Marion mine and deferring a third lithium train at its Wodgina mine. A fourth train had also been considered. The company has also deferred its stage two expansion at its Ashburton iron ore mine.

To rub salt into the wound, Mineral Resources is not the only miner to cut back production and defer expansion plans, and this has weighed on prospects for the company’s mining services business.

Yet, in response to this general malaise, management has decided to increase capital expenditure substantially well above analysts’ assumptions.

Cash Preservation?

If the purpose of cuts and deferrals is to preserve cash, Jarden ponders, why has FY25 capex been guided almost $2bn more than double the broker’s earlier estimate — despite updated production guidance falling well short of forecasts? Such are the constant ambiguities with Mineral Resources’ financial results and management briefings, Jarden sighs.

Extremely weak FY25 production guidance across the lithium assets is a reflection of cash constraints and the supply-side behaviour is at odds with well-funded peers lower on the cost curve, Jarden notes, including Pilbara Minerals ((PLS)) and IGO Ltd ((IGO)). Despite recently completing a capital-intensive expansion at Mt Marion to facilitate production of 900ktpa, management has guided to FY25 production of only 300-340kt — a material -25-35% reduction from FY24 production of 463kt.

“It seems to us something is not right at the Mt Marion JV and the issues extend beyond ore availability in our view,” Jarden comments. Similarly, at Wodgina, production guidance of only 420-460kt represents running only two trains at less than nameplate capacity. It is possible the JV partners have different motivations, which could act to the detriment of Mineral Resources shareholders. In response, Jarden has completely removed Wodgina Train 4 from its modeling, which in isolation results in a -$6.50/share valuation decrease.

Jarden maintains a view that Wodgina, as an asset, can support more processing capacity but with a difficult and conflicted JV structure and a constrained Mineral Resources balance sheet, the broker removes it for now.

Jarden has retained a Sell rating and cut its target to $32.00 from $44.70.

Overall, Goldman Sachs assumes Mineral Resources has implemented a strategy that assumes lithium and iron ore prices stay at current depressed levels for a short period only. At spot prices, this broker estimates all of the company’s five mining assets are free cash flow negative, and that Ashburton will only be free cash flow positive sometime in the June half on a US$95/t iron ore price forecast and assuming a production run rate of over 20Mtpa.

If commodity prices decline further, then Goldman Sachs thinks the company may need to cut capex and opex further and potentially place Iron Valley and Mt Marion on care and maintenance.

FY25 capex guidance is well above Goldman’s estimate. Looking at the balance sheet, the broker forecasts net debt to increase to over $6bn by the end of FY25. Goldman has cut its target by -9% to $43, but given the share price decline, has upgraded to Neutral from Sell.

Following the company’s FY24 results, Morgans went the other way, lowering its target to $39 from $53 and downgrading its rating to Hold from Add on a higher assessment of near-term balance sheet and commodity risk. The brokers’ risk assessment is balanced against existing debt levels and upcoming capex commitments.

The Road to Redemption

“Onslow Iron is set to redefine mining in Western Australia through world-first autonomous road trains, industry leading dust free transport and resort-style workforce accommodation.”

This website declaration is a reference to the tarred road Mineral Resources is building from its Onslow iron ore operation in WA to port. A week ago the company announced at a business update it had received FIRB approval for the sale of -49% of the Onslow Iron Haul Road. Following the approval, upfront consideration of $1.1bn is expected to be received within three weeks. On cost reductions, Mineral Resources identified -$300m in FY25 costs savings, without impacting production guidance, with more being investigated.

Mineral Resources’ share price weakness is driven by the combination of its net debt level and weak commodity prices and sentiment, Bell Potter notes. Management expects Mining Services earnings of $1bn per annum from FY26, which will be foundational to deleveraging the balance sheet.

The share price appreciated 16% on the business update, a very strong response, Bell Potter suggests, to a well-guided capital release, and speculation of a modest quantity of marginal Chinese lithium production suspension. The response is seen as indicative of how sensitive the share price is to good news on the balance sheet and commodity sentiment.

Management reiterated it has many non-dilutionary options to release capital, which could be interpreted as signalling Mineral Resources has no plans to raise new equity capital, and foreshadowing further asset sales to release capital, Bell Potter suggests.

Bell Potter has a Buy rating and a $66 price target. We are beginning to see a wide spread of targets.

After the haul road sell-down, management has realised it does not need to own 100% of infrastructure, Citi reports. Citi has a Buy rating and a $50.00 target.

It’s a Gas

This week, Minerals Resources released its initial resources estimates for the Lockyer Gas project and Erregula oil project, both onshore Western Australia, which have been under extensive exploration since the company made the Lockyer Deep-1 find in 2021. These are two of the largest onshore hydrocarbon discoveries in the state.

The Lockyer gas resource on a 2C basis (base-case scenario) equates to 76mbbl of oil equivalent, Ord Minnett notes. Meanwhile, the Erregulla oil project is estimated to contain a 2C contingent oil resource of 32mmboe, the largest onshore oil find in Western Australia since Barrow Island in 1964.

Ord Minnett has lifted its target on Mineral Resources to $58.00 from $56.50 and retains an Accumulate rating.

The resource estimate alone, in terms of an in-ground valuation estimate on a 2C basis (ignoring any complexities to develop and based on recent trade sales) is 45% better than the valuation encapsulated in Morgan Stanley’s base case, with significant upside still from unexplored tenements (albeit valuation is also dependent on WA government policy progress on gas exports).

With plenty of opportunity to crystallise value, this showcases another asset that Mineral Resources could utilise to ease balance sheet pressures, Morgan Stanley suggests, should it be required. Not only is the broker Overweight the stock, with a target of $70, it has Mineral Resources as its key pick in the sector.

As a guide to resource valuation, Evans & Partners has turned to the valuation of Beach Energy’s ((BPT)) Waitsia gas project (Mitsui 50%) also in the Perth Basin, albeit Waitsia is almost completed.

Evans & Partners believes Mineral Resources is actively exploring a sale of its energy business. Beach/Mitsui could be interested given the Waitsia project has a reserve life of 10-11 years. Hancock Energy could also be interested given neighbouring permits and gas discoveries. A full sale could release close to $500m or more, which would strengthen the company’s liquidity position and de-risk the investment proposition.

Evans & Partners has a Positive rating on Mineral Resources and a $67 valuation.

Wider than the Perth Basin

Macquarie has reduced its target on Mineral Resources by -17% to $40 on the back of reduced lithium and iron ore price forecasts. The company’s heightened financial leverage, along with higher operationally levered iron ore operations, leads to significant earnings cuts. However, from a valuation stance, its long-term asset position and competitive services business (which hedges commodity price volatility), provides insulation, Macquarie suggests.

This broker has upgraded to Outperform from Neutral.

All up, brokers monitored daily by FNArena covering Mineral Resources have set target prices in a range of $39 (Morgans; Hold) to $70 (Morgan Stanley; Overweight). Among these brokers there are five Buy or equivalent ratings, one Hold and one Sell (UBS).

It should be noted not all brokers have updated their valuations since the FY24 result release, with the Onslow road sell-down and Perth Basin gas resource updates having transpired since.

Nor has Jarden updated, since setting a Sell rating and $32 target. Nor Goldman Sachs (Neutral; $43). Evans & Partners’ rating and target have been set subsequent to both updates.

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