Mineral Resources has effectively swapped out the downstream China risk to develop lithium battery chemicals with a more domestic pathway forward. This is likely to take longer and perhaps may rely on government support. Gaining more control of the destiny of the lithium business seems to be the obvious driver but it changes the risk profile, rather than reducing it.
In yet another change to the MARBL JV with Albemarle, first signed in February 2023, MIN will increase its share in the Wodgina lithium mine to 50% (from 40%) while Albemarle will take full control of the Kemerton lithium hydroxide plant. This makes sense as each company operates the respective asset. The additional change is that MIN will back away from the Chinese conversion side of the JV, leaving that to Albemarle. Instead, MIN will look to build its own downstream facilities with a decision on an Australian lithium battery chemical plant expected in September.
In the meantime, MIN will continue the tolling arrangement with Albemarle for the Wodgina production until June 2024 at which time MIN will take over marketing its own production in China.
Albemarle will pay MIN approximately US$380-400m for its share in Kemerton and completion adjustments at Wodgina and Kemerton.
Meanwhile, MIN’s 4Q23 production was mostly unremarkable. The lithium assets (Wodgina and Mt Marion) were as expected while the iron ore shipments enjoyed a smaller discount to the Platts Index price. Mining Services contract volumes recovered in 4Q23, and a new crushing plant was commissioned. The Onslow Iron Ore Project has received approval for all major roads and first ore remains targeted for mid-2024.
MIN achieved an average quarterly spodumene price of US$2,589/dmt which is down almost -38% from the 2Q23 average price. The fall in spodumene and lithium chemical prices was expected given previous elevated levels.
Investment View
The changes to the MARBL JV make sense but does now put pressure on MIN to deliver on an Australian solution to downstream lithium chemical processing. The appeal of this is enticing but carries technical risk in exchange for the greater control over the strategy. It could take longer than expected and there is the potential carrot of government support, although we discount this.
FY24 is shaping up as a big capex year for MIN, particularly as the Onslow Iron Ore Project gets into the big stuff. Having a slightly improved balance sheet will help but may not be enough to fully fund the downstream lithium processing that is now on the agenda. Mt Marion and Wodgina will be ramping up while the Board decides its next move on how best to monetise the lithium assets.
Risks to Investment View
Electric vehicle adoption may take longer than expected which could slow the rate of demand growth for lithium. Battery technology may also change, possibly reducing reliance on lithium. Supply of lithium is uncertain depending on geology and location. Lithium pricing is also uncertain as changes in supply may alter contract prices. MIN is exposed to the usual development and production risks with mining projects including operational, regulatory and financial risks.
Recommendation
We have retained our Hold recommendation.
