Wodgina Boosts Mineral Resources’ Lithium Stakes

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Mineral Resources is shaping up to be a significant supplier of lithium. Deutsche Bank has upgraded the stock to Buy, judging it will be a number one producer globally after its two key projects ramp up.

-Current resource at Wodgina could increase to 200mt based on recent drilling
-Weakness in iron ore prices took the shine off first Wodgina shipment
-Wodgina and Mt Marion now contribute 50% of Deutsche Bank's estimated FY18 EBITDA
 

By Eva Brocklehurst

Mineral Resources ((MIN)) is shaping up to be a significant supplier of lithium. The company is ramping up its sales of direct shipping ore (DSO) to 300-500,000 tonnes per month at Wodgina and should start producing spodumene during 2018. Mining of the ore began in February and the first cargo of DSO grading 1.64% lithium dioxide was dispatched in April.

The company's other key project, Mt Marion, is approaching nameplate of 400,000 tonnes per annum of spodumene. The company appears set to become a 100,000tpa lithium carbonate equivalent producer, and possibly the largest globally, once Wodgina and Mt Marion are both in production.

Deutsche Bank upgrades to Buy from Hold, enthusing over the potential with the inclusion of direct shipping ore at Wodgina. The upgrade means all three FNArena database brokers covering the stock now have Buy or equivalent ratings.

The inclusion of DSO has increased the Deutsche's valuation of Wodgina to $795m and the project's internal rate of return is calculated at over 200%. Deutsche Bank upgrades FY18 and FY19 estimates for earnings per share by 85% and 32% respectively. The broker believes lithium can offset weak iron ore product discounts.

Morgan Stanley observed a couple of months ago that the first shipment from Wodgina was overshadowed by the downward movements in iron ore prices, but also believes context is important. The broker upgraded the stock to Overweight earlier this year, although acknowledges recent weakness in iron ore prices have rubbed the shine from the stock.

The reason for the continued optimism centres on the view that a majority of the company's operating earnings should come from lithium production from FY19 onwards, and this would offset any negative moves in the iron ore market. Morgan Stanley agrees further details on Wodgina offtake will be a positive value driver and a key catalyst for the company.

The broker awaits further information on the offtake contract, achieved pricing and production rates. Initial production rates of 1.2mt in FY18 and a further ramp up to 2.4mt in FY19 are incorporated in estimates.

Wodgina History

The company bought Wodgina from Global Advanced Metals in 2016 for an undisclosed sum. Tantalum from Wodgina pegmatites was mined up until 2012 but never assayed for lithium. Mineral Resources has re-assayed over 65,000 pulp samples to better understand the distribution of lithium-bearing spodumene throughout the lease.

The company is achieving a 98% grade reconciliation, Deutsche Bank notes. The deposit also has low levels of micaceous lithium minerals and no thorium or uranium.

Mineral Resources already owns and operates a crushing plant on-site and is now crushing and producing direct shipping ore for customers in China. While the current resource stands at 121mt at 1.3% lithium dioxide, in the Deutsche Bank's view this could increase to 200mt at a higher average grade based on recent drilling.

The broker expects construction of the spodumene plant to begin in August, with commissioning in June next year and first spodumene production in the September quarter of 2018.

As the spodumene plant ramps up the broker assumes direct shipping ore sales will ease off. The spodumene plant approval may be reliant on selling down 50% of the project to an offtake partner and the broker suspects a sell-down above valuation would be a major positive catalyst.

Deutsche Bank suspects Wodgina will be one of the highest returning lowest cost, hard rock lithium projects globally. The broker concedes the economics for DSO at the project are difficult to determine as there is no market price for DSO and the market is in the early stages of development. DSO sales will be dependent on demand, recoveries and the economics achieve through the processing plants in China.

Wodgina and Mt Marion now contribute around 50% of the broker's estimated operating earnings (EBITDA) in FY18. The company has also indicated it still intends to sell down its stake in Mount Marion to 10% from 43%.

There are three Buy ratings on FNArena's database. The consensus target is $13.22, suggesting 19% upside to the last share price. Targets range from $12.00 (Deutsche Bank) to $14.51 (Macquarie). The dividend yield on FY17 and FY18 forecasts is 3.9% and 5.3% respectively.

Macquarie has not updated on Mineral Deposits since the company's result release in February. The broker retained Outperform on an earnings beat and lifted forecast earnings based on FY17 guidance.

That guidance did assume a second half average iron ore spot price of US$70/t, which is likely a little ambitious in retrospect. Macquarie is nevertheless yet to reassess its high-end target price.
 

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