Mineral Resources: Formidable resource player with lithium clout
About the author:
- Author name:
- By Adrian Prendergast
- Job title:
- Senior Analyst
- Date posted:
- 22 December 2022, 8:00 AM
- Sectors Covered:
- Mining, Energy
- We initiate research coverage on Mineral Resources (ASX:MIN) with an ADD rating and a (login to view) target price.
- MIN is a founder-led business and top tier miner and crusher that has grown consistently despite barely issuing a share over the last decade.
- Also helping our investment view is that MIN’s diversification leaves it far more capable of tolerating volatility in lithium markets than its peers in the sector.
- A key hurdle for our ADD rating is the outperformance of MIN’s share price, although it still looks undervalued against its organic growth pipeline, dividend profile, and mix of market exposures.
Initiate coverage with an ADD rating
We initiate coverage on MIN with an ADD rating and (login to view) target price. MIN is a business that is transforming from being primarily leveraged to high-cost / short-life iron ore operations to low-cost / long-life iron ore and lithium assets. This transition accelerated in the September quarter 2022 post Wodgina’s restart. We expect the growth planned for all segments will see MIN remain supported.
MIN is the world’s largest crushing contractor, a top five global lithium producer, a top five Australian iron ore producer, and the largest landholder in the Perth Basin (gas/condensate). It is a formidable founder-led business.
Over the next 2 years we expect MIN to grow its mining services, lithium and iron ore operations, unlocking value ahead of the share price appreciation already seen over the last 6 months (driven mostly by rising lithium prices and Wodgina restart).
MIN’s flagship business is its contractor crushing and mining services, with a comprehensive ‘pit-to-port’ suite of services, which has supplied MIN with a stable and growing earnings base. MIN’s lithium operations have also recently boomed on a combination of price and volume growth.
Riding the current upcycle in lithium and iron ore prices, we expect EBITDA to triple in FY23 to ~A$3.3bn. This would see the dividend yield jump to 6.1%, a significant increase on FY22 when MIN did not pay an interim dividend.
Not sitting idle, MIN is pursuing organic growth across all segments. MIN will self-fund its growth, and while we expect ND/EBITDA to remain at a healthy ~0.6x, we also expect gearing (ND/ND+E) to reach a peak of 30% in FY24.
We note these borrowing assumptions are sensitive to lithium and iron ore prices, which could see free cash flow track ahead of our estimates if prices do not moderate.
A key risk to our investment view and ADD rating is MIN’s impressive share price performance during 1H23, although it is supported by sharp earnings growth from a combination of: a) surging lithium prices, b) resilient iron ore prices, and c) volume growth across the business.
We value MIN at A$94ps based on the sum of DCFs for each of its operational assets in each segment, and an in-situ multiple on its gas resource potential.
Our valuation uses a WACC of 9.8% (3.6% RFR, 6.0% risk premium), which is conservatively based on a long-term Debt:Equity funding assumption of 40:60.
Arguably, we could have set this mix at 100:0 given MIN has funded all of its growth from debt and internal cash flow for more than a decade. This would have delivered a WACC of 5.3% and a valuation of A$135ps.
Current volatility in lithium, which could see a continued selloff in the short term.
December quarter operational result (January 2023).
- Mining services tonnes to be flat (69mt).
- Mt Marion to see further volatility as part of its expansion to 900ktpa.
- Wodgina to continue its smooth ramp up.
- Yilgarn to reduce the spread of pits it is mining from (currently ~150km).
1H23 earnings and dividend result (February 2023).
- Commodity price/FX risk; inflation risk.
- Execution risk on growth projects.
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