Execution Remains Key For Mineral Resources

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While Mineral Resources performed strongly operationally in the fourth quarter, not everyone is comfortable with its debt and the outlook for commodity prices.

-Mineral Resources’ strong fourth quarter across all segments
-Production outperformance, strong cashflows at Wodgina and Onslow
-Onslow progressing toward nameplate capacity
-Improving balance sheet, but sensitivity to commodity prices remains

By Mark Woodruff

Diversified mining and mining services company Mineral Resources’ ((MIN)) released a strong June quarterly performance across all operating segments, signaling operational recovery after a challenging year and winning almost universal praise from analysts, but it hasn’t quelled completely lingering concerns about its elevated debt and capacity to stay out of troubles.

Production volumes were largely ahead of consensus forecasts and revised FY25 guidance was achieved.

Morgan Stanley adds the lithium performance was particularly strong, resulting from a standout performance at the Wodgina lithium operations in the Pilbara region of Western Australia though Jarden counters price realisations were weak.

Wodgina delivered a record low FOB cost for spodumene concentrate of $641/dmt, supported by ongoing cost reduction efforts and improved recoveries, stated management.

Ord Minnett describes the achievement of FY25 cost guidance at both the Mt Marion and Wodgina lithium projects, following a particularly difficult first half, as an impressive outcome.

Importantly, Onslow (iron ore) is on track to achieving nameplate capacity, one of the prerequisites to trigger receipt of a material contingent payment.

Cashflows at both Wodgina and Onslow beat expectations largely due to these better cost performances, highlights RBC Capital, and FY25 net-debt was lower than expected on lower capex/operating cash flows.

Mining Services volumes also came in ahead of the consensus expectation.

This strong operating momentum to finish FY25 leads Morgan Stanley to upgrade its FY26 forecasts, mainly for lithium.

In contrast, Jarden sees nothing in the quarterly result or subsequent management call to shift its high conviction Sell rating, citing the absence of forecast free cash flow to meaningfully address the company’s stretched balance sheet.

While leverage levels have been a key investor concern, Morgan Stanley sees leverage metrics improving as Onslow ramps, with deleveraging options available through further asset sales, if required.

Liquidity remains strong, according to management, at over $1.1bn, with the ratio for net debt to earnings (EBITDA) continuing to fall.

RBC Capital suggest the strategic focus over the next 24 months is clear: strengthen the balance sheet, scale back capex, ramp up Onslow, and maximise cash generation from operating assets.

Certainly, the analysts at Barrenjoey (which whitelabels research for Ord Minnett) believe management will be able to further de-risk its assets profiles in iron ore and lithium and demonstrate improved corporate governance.

Increasing disclosure and actions taken to simplify the business and improve capital allocation have improved the company’s investment proposition, on Macquarie’s assessment.

The balance sheet remains highly sensitive to movements in iron ore and lithium prices, both of which have recently rallied, but this broker maintains a cautious stance on the iron ore outlook.

Macquarie maintains upcoming supply growth from Simandou is set to meet a stagnant demand environment for iron ore over FY26-28.

Operations and performance

Iron ore remains the largest business segment. Only about 12% of FY25 revenue was derived from lithium with iron ore accounting for the majority of the remainder (roughly half of total revenue).

The company operates large-scale iron ore mines in Western Australia across multiple hubs.

The Onslow project in the West Pilbara was developed through a joint venture with several steelmakers.

Operations are cash flow positive and progressing toward 35mtpa nameplate capacity, having achieved an annualised run-rate of 32.4mtpa in June.

The project features integrated mine-to-port infrastructure, including a dedicated 150km haul road and a transshipment port with custom 20,000-tonne barges. The completion of Onslow’s haul road upgrade remains on target for the first quarter of FY26.

In addition to Onslow, the company’s established Pilbara hub shipped around 9.7mt in FY25.

Fourth quarter equity shipments of 5.84mt for iron ore were strong, suggests Morgans, coming in 7% above this broker’s forecast and 4% above consensus.

Regarding lithium, here Mineral Resources also operates two major hard-rock lithium mines in WA which produce spodumene concentrate.

The Mt Marion mine (Goldfields region) and Wodgina mine are each 50:50 joint ventures with partners Ganfeng and Albemarle, respectively.

Each site has an on-site concentrator plant, with capacity of 600,000tpa at Mt Marion and 900,000tpa at Wodgina. In FY25, Mt Marion shipped circa 203,000dmt and Wodgina around 214,000dmt of spodumene concentrate.

Destined for export markets, production is trucked to port in Esperance for Mt Marion and Port Hedland for Wodgina.

Equity shipments for the fourth quarter of 135kt also exceeded expectations, beating Morgans’ and consensus estimates by 6% and 4%, respectively.

FY25 shipments for both iron ore and lithium met guidance.

Mineral Resources has two other segments, namely Mining Services and Energy.

The company owns and operates a contract mining services business which undertakes work both internally (at its own mines) and for third-party clients.

This business provides earnings resilience, generating strong cash flows even in a low commodity price scenario, explain the analysts at Morgan Stanley.

Fourth quarter volume for Mining Services of 83mt exceeded Morgans’ and consensus forecasts by 15% and 9%, respectively, bringing FY25 volumes to 280mt, in line with the lower end of guidance.

The outperformance relative to consensus was primarily driven by the ramp-up at Onslow and stronger external volumes, explains the broker.

Mineral Resources also has an Energy segment (joint venture interests) focused on natural gas exploration and development in the onshore Perth Basin and Carnarvon Basin of Western Australia.

Gas assets include Lockyer Deep, North Erregulla, and Waitsia Stage 2 (non-operated interest).

Here, Mineral Resources is aiming to secure low-cost gas supply to reduce energy costs at its own operations, and potentially supply into the WA domestic gas market.

Debt

Morgan Stanley notes FY25 net debt of approximately $5.35bn came in below the consensus forecast, supported by a favourable circa $200m currency revaluation gain due to quarter-end exchange rate treatment.

Liquidity remains solid at over $1.1bn and the broker expects the net debt to EBITDA metric to decline to 3.2 times in FY26 and 2.5 times in FY27, down from around 6.2 times (as expected by management for the end of FY25), driven by the ramp-up at Onslow and strong margin contributions from the Mining Services segment.

The analyst at Morgans is currently comfortable with the company’s cash position and ability to refinance its first senior secured bonds due in 2027.

Iron ore volumes, costs and pricing

Onslow iron ore shipments rose 59% quarter-on-quarter to 5.76mt, matching Jarden’s forecast (consensus: 5.55mt), while unit costs of around $57/wmt FOB (including the haul road toll) came in slightly below this broker’s $60/wmt estimate.

Iron ore price realisations disappointed, averaging around 80% across both Onslow and Utah Point. The achieved price of US$79/dmt represented only around 80% of the Platts 62% IODEX, falling short of Jarden’s expected 83%.

Pleasingly, Onslow generated positive cash flow during the June quarter, enabling repayment of approximately $23m on the carry loan owed by Mineral Resources to its joint venture partners.

Initial FY26 guidance included Onslow shipment volumes broadly in line with Jarden’s expectations, alongside capital expenditure of around -$1.15bn (inclusive of approximately -$150m in asset financing).

Full guidance is expected with the FY25 results in August.

Morgans identifies one key near-term catalyst as achieving nameplate capacity at Onslow by the first quarter of FY26.

Equally important is maintaining that haul rate for at least one quarter during FY26, which would unlock the remaining $200m contingent payment from Morgan Stanley Infrastructure Partners (MSIP) tied to the haul road transaction.

As part of the September 2024 deal to sell a 49% stake in the haul road, MSIP agreed to a total consideration of $1.3bn, comprising an upfront cash payment of approximately $1.1bn and a deferred $200m component.

The final $200m is contingent on the Onslow haul road sustaining a haulage rate consistent with 35mtpa of iron ore transported over the asset.

Outlook

Ord Minnett states the marked improvement in Mineral Resources’ operational performance has reinforced its confidence in the quality and resilience of the company’s asset portfolio.

Morgans also maintains a positive operational outlook as the company demonstrates improving execution across its core assets.

Unmoved, Jarden maintains its Sell rating, citing limited valuation support and elevated balance sheet leverage.

Jarden analysts note the key risk to their view are stronger-than-expected iron ore prices, which could be underpinned by sustained Chinese steel production or a significant supply-side disruption.

Macquarie raises its target price to $29 from $22 on improved lithium costs and truncating Pilbara Hub losses, but downgrades to Underperform from Neutral on valuation.

Following fourth quarter results, the average target of six daily monitored brokers in the FNArena database increased to $31.00 from $27.07, implying just over 8% upside to the latest $28.59 share price this Friday morning.

Two of the six brokers have Buy (or equivalent) ratings and four are on Hold.

Outside of daily coverage, Jarden has a Sell rating with a $16.20 target, while RBC Capital (target $38.00) is a Buy-equivalent.

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