Mineral Resources: Metal price strength carrying earnings
About the author:
- Author name:
- By Adrian Prendergast
- Job title:
- Senior Analyst
- Date posted:
- 30 January 2023, 7:00 AM
- Sectors Covered:
- Mining, Energy
- No major changes to our forecasts for Mineral Resources (ASX:MIN) following a mixed 2Q23 result.
- Iron ore and lithium volumes lagged, while realised prices were strong.
- Marginal delay to Mt Marion’s expansion to 900ktpa, now expected in July.
- Applying updated lithium and iron ore price forecasts has seen our Target Price increase (login to view).
- Maintain our ADD rating, with the view that MIN is ideally placed to benefit from China re-opening with lithium and iron ore markets likely to remain tight.
Steady 2Q23 result
MIN posted a steady 2Q23 performance overall. Healthy volumes and prices, against a downgrade at Mt Marion.
Spodumene production from Mt Marion in 2Q23 of 121kt (vs Visible Alpha consensus 130kt / Morgans 135kt) with shipments of 116kt (vs Morgans 135kt) fell short of expectations. Work to expand Mt Marion to 900ktpa has been pushed back slightly on a delay in processing equipment and tight labour.
Expanded production now expected in July. This led to a cut to guidance to 250-280kdmt (from 300- 330kdmt). This also saw unit cost guidance for Mt Marion in FY23 increase to $540- $590/t (from $460-$510/t).
The smooth ramp up of Wodgina continued in 2Q23, with lithium spodumene concentrate production of 92kt (vs consensus 94kt / Morgans 88kt). All three plants at Wodgina have been commissioned, although only two are operational until mining volumes pickup post the Stage 2 cutback (mid-2023).
A solid quarter in terms of spodumene pricing achieved, with Mt Marion (US$4,151/t) and Wodgina (US$4,187/t) roughly in-line with our estimates.
MIN reported healthy hydroxide volumes, and (for the first time) lithium carbonate sales. MIN could not commit to which product it would focus on with Mt Marion’s offshore processing, highlighting that the focus each period would be on maximising margins.
Hydroxide/carbonate sales increased 75% qoq, while average realised price of US$66k/t was below our estimate of US$75k/t.
Iron ore was healthy, with 2Q23 production of 5.5mt +13% qoq on strong performances from Wonmunna and Iron Valley. Shipments lagged at 4.1mt -9% qoq. Again a positive outcome on pricing, with price realisations of US$97/dmt (Morgans US$93/dmt).
No changes to development of Onslow Iron (30mtpa), where we expect first production in 2H’FY24.
At first glance MIN’s FCF yield appears disappointingly low during FY24 and FY25, but this is likely because we have become conditioned to analysing growth-starved large-cap Aussie miners.
This is in stark contrast to MIN, who is investing in material growth across all three segments (lithium, iron ore and mining services) with lithium and iron ore transitioning to long-life / low-cost operations.
Being the only large-cap miner in our coverage universe with above +4% CAGR production growth over the next 3 years, we see MIN’s lower FCF yield as justified and not a fundamental disadvantage, especially maintaining a +4% dividend yield.
Forecast and valuation update
Updated for the 2Q23 result, and Mt Marion guidance changes.
Applied higher house iron ore and lithium price forecasts (summary further).
We maintain our ADD rating, with a net-increase in Target Price to (login to view).
We see MIN’s lithium / iron ore market exposures as an ideal combination to benefit from the China re-opening increase in demand during 1H’CY23.
We also see MIN as well placed to ‘grow into’ its valuation, even if we see unexpected metal price volatility, given the magnitude of organic growth in the pipeline.
Execution risk on Onslow Iron development. China risk (metal demand drivers).
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