Mineral Resources: JV restructure adds real value
About the author:
- Author name:
- By Adrian Prendergast
- Job title:
- Senior Analyst
- Date posted:
- 27 February 2023, 8:00 AM
- Sectors Covered:
- Mining, Energy
- Mineral Resources (ASX:MIN) reported softer 1H23 earnings and the completion of the MARBL JV restructure, for a net positive increase in our valuation to (login to view).
- 1H23 was a miss vs consensus, but it was an impressive jump in earnings vs pcp.
- Meanwhile, on balance the 1H23 result was in line with our estimates on EBITDA and operating cash flow, while trailing on NPAT.
- We maintain our ADD rating on MIN, with a (login to view) target price.
1H23 result recap
Underlying EBITDA of $939m (vs MorgE $931m vs Vuma consensus $1,002m), +503%. EBITDA from all three segments was short of expectations, lithium $756m (-3% vs consensus), mining services $255m (-2%) and iron ore $37m (-47%). The source of the misses appeared driven by skew in costs, with a strong H2 expected.
Underlying NPAT of $387m (vs MorgE $447m vs consensus $484m), +1,890%.
MIN supplied an impressive level of detail and transparency in its reporting.
The 1H23 result might have missed consensus expectations by -6% in EBITDA and -20% in NPAT terms, but was still an impressive increase in profitability to a group EBITDA margin of 40% (vs 12% pcp).
A much larger miss vs EBITDA, which we attribute to higher depreciation across both iron ore and lithium.
Operating cash flow of $281m (vs MorgE $297m vs consensus $508m) was close to our estimate but substantially below consensus, leading to a similar miss in FCF (actual -$460m vs MorgE -$542m vs consensus +$363m).
Interim dividend of $1.20ps (vs MorgE $1.18 vs consensus $1.07).
Net debt finished 1H23 at $1,394m (vs MorgE $1,462m vs consensus $1,276m).
The big news was the ~6-month delay in the expected startup of Onslow Iron Project to mid-CY24 on permitting delays (due to congestion). Production/cost guidance unchanged, while capex guidance +14% on MARBL JV restructure.
MARBL JV restructure
A day prior to the 1H23 result, MIN announced it had agreed to the restructure of the MARBL JV. The deal had several moving parts, and if approved by regulators will see MIN’s equity in Wodgina increase to 50% (from 40%), while its interest in Kemerton will decrease to 15% (from 40%).
We agree with MIN’s assessment that the deal aligns its interest with its expertise, as the operator of Wodgina (while Albemarle holds significant downstream expertise).
Our first impression of the MARBL JV restructure is that the deal appears value accretive for MIN, in particular the new conversion agreement with JV partner Albemarle.
We see the agreement to produce 100,000tpa of lithium chemicals under a 50:50 JV as a significant positive (MIN share of capex $660m, $350m of which we expect payable in 2H23), with each party set to market their own product.
Forecast and valuation update
We have made significant changes to our model, to include the changes from the MARBL JV. Assuming lithium chemical production starts from the Qinzhou plant (25ktpa) in China in early CY24, with the Meishan plant (50ktpa) contributing from early CY25, and a third plant (25ktpa) in late CY25.
In the meantime we have the existing conversion agreement for offshore processing continuing until the new capacity ramps up. We have also adjusted our model for the additional detail reported, and pushed back the assumed startup of Onslow to mid-CY24.
Post changes our valuation-based target price increases to (login to view).
Trading lower leading up to the result, we see more value on offer. Post the 1H23 result our valuation on MIN’s iron ore and mining services businesses decreased by 36% and 4% respectively, while our valuation on MIN’s lithium business has increased 17% following the result and MARBL JV restructure.
MIN’s share price remains a key hurdle, but trading down lower into the result has created value. We maintain our ADD rating with a (login to view) target price.
Execution on Wodgina, Onslow, and Mt Marion. Metal price risk.
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