Mineral Resources remains a fascinating commodities infrastructure business with multiple growth opportunities, not just in the hot potato lithium sector.
Lithium earnings leapfrogged Mineral Resources’ iron ore earnings in FY22 as the price momentum carried lithium upwards and iron ore down. A 42% fall in the average US$/t iron ore price achieved was enough to drag MIN’s iron ore earnings down to $64 million EBITDA from $1,528 million in FY21. Conversely, a 329% increase in the average spodumene price achieved helped lithium earnings to increase to $585 million from a small loss last year.
Lithium growth
MIN’s five year plan for lithium will see production reach approximately 118ktpa (MIN’s share) of LiOH. This assumes Wodgina expands to four trains with 1,000ktpa of spodumene concentrate production (7x conversion factor to LiOH). JV partner Albemarle and MIN are still considering the construction of a fourth train at the end of this calendar year. Mt Marion (MIN 50%) is assumed to lift production to 900ktpa of mixed grade spodumene concentrate (equivalent to 600ktpa of 6% SC).
The MARBL JV is under a proposed restructure so that MIN’s ownership would change from 40% to 50% at Wodgina. The JV partners would jointly fund a new LiOH conversion plant and MIN’s ownership of the Kemerton LiOH plant would reduce from 40% to 15% (Albemarle to operate).
Iron ore growth - Onslow iron
The Red Hill Iron Ore JV has been restructured taking MIN’s share to ~60%. In exchange, MIN will fully fund the total $3 billion capex upfront for the project consisting of a $1.3 billion MineCo and a $1.7 billion InfraCo. The minority partners (POSCO, Baowu, AMCI) get a free carry of their ~$520 million through a shareholder loan repayable from project cashflows.
The revised capex budget is higher than prior guidance of $2.4-2.55 billion but the total project is now larger at 35mtpa (was 30mtpa).
The project effectively unlocks stranded iron ore deposits in the West Pilbara region. JV partner Baowu (18.7%) has a life-of-mine offtake for 50-75% of the product.
This project points to the innovative approach MIN is prepared to take, due to its balance sheet strength and its technical prowess, that few others can or are willing to do. The project relies on some unusual aspects such as the 150km private haul road using huge 320 tonne autonomous road trains taking ore to the Port of Ashburton (near the town of Onslow) where 5 transhippers will move the ore to capsize vessels offshore, rather than portside loading.
Investment view
The market is a bit bewildered by the slightly unconventional way that MIN goes about its investments. The Onslow project is taking plenty of risk upfront by undertaking all the construction funding and the unconventional means of taking ore from mine to ship has some heads tilted.
MIN has a lolly jar of other projects that over time could create further value. The rail line at Yilgarn, access to the new extra berth at Port Hedland and other infrastructure assets could be appealing as an investment opportunity for superannuation or private equity buyers, for example.
MIN also has an energy string to its bow. MIN is the largest landholder of onshore gas acreage in the Perth and Carnarvon Basins in WA. The Lockyer Deep 1 discovery (natural gas) completed testing in March this year and is close to existing infrastructure. Two appraisal wells will be drilled in FY23, two more in FY24 with production planned for FY24f.
MIN’s ownership of two of the world’s top five lithium mines places it squarely in the target zone for EV battery makers who simply cannot get enough of the stuff. Europe is at the epicentre of governmental regulatory change and has approved (EU Parliament) an ICE ban by 2035. The US Federal Government target is for 50% EVs by 2030 and 100% by 2035. Even if these ambitious targets get pushed out, or brought forward as conditions change, lithium will be in heavy demand for a long time. The key risk here is if battery technology changes say to hydrogen cell technology for example.
Lithium prices (Figure 3) have climbed a steep wall, but commodity experts Wood Mackenzie see the price of LiOH and spodumene concentrate softening in the next few years, but will remain attractive, nonetheless.
MIN’s free cash flow is sufficient to cope with the capex demands, even if commodity prices fall. If FCF should turn negative, the balance sheet has very low gearing and adds further financial flexibility. CEO Chris Ellison makes the point that MIN has not raised equity since it listed in 2006.
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 Buy recommendation.
Figure 1: FY22 result
FIGURE 2: EBITDA FACTORS
FIGURE 3: LITHIUM HYDROXIDE PRICE OUTLOOK
