Mineral Resources’ energy division was shaping up to become the company’s fourth leg of growth. The failed Lockyer-2 appraisal well is not the end of this strategy, but it is a setback, especially after the recent takeover of Norwest Energy, its partner at Lockyer.
After drilling to a target depth of 4,347m in the Lockyer-2 appraisal well, only low levels of gas were detected. The well has been suspended.
NWE’s release on the drilling indicated an interpretation that the potential resource is now ~11 square km (the worst case) and not the ~102 square km previously thought. The data implies a theoretical recoverable resource of just ~268Bcf, a long way short of the 2.3-2.6Tcf extrapolated from the Lockyer-1 Deep appraisal well.
The company is expected to continue drilling its six hole appraisal program. The drilling rig will move to the North Erregulla Deep-1 exploration well where results can be expected sometime around July.
Coinciding with the drilling news, MIN’s Executive GM of Energy has resigned.
MIN has now reached 76% ownership in its off-market takeover for Norwest Energy (NWE). The implied equity valuation of NWE is $497m.
Investment View
The risks associated with oil and gas exploration are well understood. The Lockyer Deep project may yet find commercial quantities of gas but for now, this is not the case. Worse, MIN appears to have forked out too much acquire the full NWE business.
Before investors become too dismayed, the energy division is still a minor part of the broader company. MIN’s iron ore, lithium and mining services divisions remain valuable growth businesses.
Ascribing long-run prices to spodumene (US$1,400/t) and LiOH (US$20k/t) could drive MIN’s share price above $100.
Risks to Investment View
EV battery technology is improving, and some variations do not use lithium although it currently dominates. EV adoption may take longer than expected which would slow the rate of demand growth for lithium. Supply of lithium is uncertain as it depends on investment criteria that might make some projects uncommercial. Lithium pricing is also uncertain as changes in supply particularly may alter contract prices. MIN is exposed to the usual development and production risks associated with mining projects including operational, regulatory and financial risks.
Recommendation
We have retained our Hold recommendation.
