Australia | Nov 02 2017
This story features MINERAL RESOURCES LIMITED, and other companies. For more info SHARE ANALYSIS: MIN
Operating earnings at Mineral Resources are expected to show a large skew to the second half for both lithium and iron ore.
-Ongoing substantial discounts for lower grade iron ore
-Jackson 5 and Bungalbin East could extend the life of Carina by 20 years
-Agreement to develop synthetic graphite facility
By Eva Brocklehurst
For Western Australian mining/services business, Mineral Resources ((MIN)), softer shipments from its iron ore operations at Iron Valley amid flat lithium DSO shipments in the September quarter suggest the second half will be critical to maintaining guidance.
Operating earnings are expected to show a large skew to the second half for both lithium and iron ore. Importantly, Macquarie notes output was higher at Carina and Iron Valley, leaving both operations on track to increase shipments over the course of the year. On the lithium front, Mount Marion is running at above nameplate capacity while mining rates at Wodgina are above 4.2mtpa.
FY18 guidance has been maintained for 13.3mt in iron ore shipments, 4.25mt of lithium DSO and 400,000tpa of spodumene. The company has also highlighted ongoing substantial discounts for lower grade iron ore.
Carina, Deutsche Bank notes, produces 58-58.5% iron ore (fines) and Iron Valley 59-60%, 60% lump product. Iron Valley is high in phosphorus and the lump product only achieves a small premium to the 60% index fines price. The broker calculates an average price realisation of 77% for FY18.
Shipments at Iron Valley are expected to be weighted to the second half and FY18 guidance of 8.2mt has been maintained. Macquarie reduces forecasts for earnings per share by -7% for FY18, as the catch-up shipments at Iron Valley are expected to realise lower iron ore prices.
Brokers highlight the securing of approvals for Jackson 5 and Bungalbin East deposits as a catalyst, with potential to extend the life of the Carina iron ore project by around 20 years. Deutsche Bank values the Carina mine at just $0.16 per share and assumes it closes in FY20. The approval of these projects would increase the broker's valuation of Carina by over $1.50 a share.
Mount Marion shipped 90,000t of spodumene concentrate in the September quarter. Spodumene production was higher than Macquarie expected and the implied build-up in stockpiles ensures the company is well placed to increase shipments over the remainder of the year. Mount Marion produced 112,000t of spodumene in the September quarter, of which 62,000t was 6% lithium dioxide.
The commencement of construction at the Wodgina spodumene plant is imminent and should underpin strong lithium production growth. Shipments are also expected to increase at Wodgina, with DSO production ahead of forecasts. Deutsche Bank models 500,000tpa by late 2019.
During the quarter the company reached a non-binding agreement with Hazer Group ((HZR)) to develop a commercial synthetic graphite facility. The project will target a 1,000tpa production rate of ultra-high purity graphite that is suitable for batteries and electrodes. Commissioning is expected to occur late in FY18 or early FY19. Ultimately, the company believes the project could produce 10,000tpa, or more.
There are two Buy ratings and one Hold (Deutsche Bank) on FNArena's database. The consensus target is $18.63, suggesting 5.0% upside to the last share price. The dividend yield on FY18 and FY19 forecasts is 3.4% and 5.1% respectively.
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