Mineral Resources: Focus Shifts To Lithium

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Amid iron ore price volatility and a subdued outlook for China's steel production hopes are being pinned on the Mineral Resources lithium projects

-Mineral Resources' lithium business should increase its contribution substantially from FY23
-Variations in production and cost assumptions are the key risks for the iron ore outlook
-Steel outlook in China could weigh on the stock
-Wodgina re-start in September quarter 2022 highly anticipated
 

By Eva Brocklehurst

The main negative implications for Mineral Resources ((MIN)) from a mixed quarterly production outcome were the provisional pricing adjustments and discounts for low-grade iron ore.

Yet brokers welcomed the announcement that Wodgina will re-start earlier than previously expected as this should mean the lithium business increases its contributions to earnings substantially from FY23.

The outlook for the business is highly dependent on variations in production volumes, cost assumptions and realised pricing for iron ore and lithium. A spot price scenario generates earnings that are -24% and -1% below Macquarie's estimates for FY22 and FY23, respectively, because of elevated low-grade discounts for iron ore amid high shipping rates.

Mineral Resources achieved an iron ore price of US$78/t in the September quarter which was 48% of the benchmark, affected by price volatility and volumes being weighted to the end of the quarter.

Market sentiment has been weak because of falling iron ore prices and Citi now assumes a first half average price realisation of 65%. The company has maintained iron ore production and shipments guidance for FY22 at 21-22mt, irrespective of delays.

Macquarie points out, as iron ore prices stabilised in September, the realised price did recover to 76% of benchmark and, while cutting assumptions for the remainder of FY22, retains a longer-term estimate of 80%.

Mineral Resources has undertaken plant upgrades at both Iron Valley and Wonmunna, which resulted in iron ore production of 2.4mt that was ahead of Macquarie's expectations. Iron ore in the Yilgarn was in-line, although shipments were -9% lower than anticipated. Yilgarn suffered from significant rainfall in July that affected the access to the open pit.

Movements in iron ore prices represent the most material risk to the broker's near-term earnings forecasts while variations in production and cost assumptions for key project are also risks.

Morgan Stanley's main concern centres on the significant expenditure required for low-grade iron ore projects. The company is continuing to progress Ashburton and asserts the project economics are compelling through all economic cycles.

Yet the broker's estimates suggest an internal rate of return of just 14% amid the impact of the addition of low-grade fines, as well as reflecting the carbon footprint. Mineral Resources remains ready to roll on Ashburton, as soon as final approvals are obtained, and is also confident in the development of South West Creek in the near future.

Ord Minnett suggests the weak outlook for steel in China could weigh on the stock, although flags the current share price is not factoring in much value for the iron ore division.

Citi reduces forecasts for operating earnings (EBITDA) by -28% for FY22 and -8% for FY23 to reflect weaker iron ore realisations that are partly offset by better spodumene prices.

Lithium

Spodumene sales from Mount Marion of 71,000t in the quarter were substantially impacted by delays to shipments. Again, rainfall in July affected access to higher grade ore. Guidance is retained at 450-475,000t per annum.

The company did not provide guidance for realised prices for Mount Marion. Yet, Macquarie asserts, with Orocobre's ((ORE)) Mount Cattlin now forecast to deliver a realised spodumene price of US$1650/t, there is significant upside potential for earnings forecasts for Mount Marion.

Nevertheless, the broker incorporates lower realisations for the remainder of FY22 and the first half of FY23 which translates to reductions for FY22 of -37% and -10% for FY23. Meanwhile, Kemerton commercial production is now expected by mid-2022 compared with the end of 2021.

Wodgina

Importantly, the Wodgina lithium mine is scheduled to re-start in the third quarter of 2022, which is a year earlier than Ord Minnett modelled. Mineral Resources and Albemarle have announced the re-start from one of the three trains which have a combined capacity of 750,000tpa of spodumene concentrate.

The company has signaled its interest in expanding downstream capacity into China and Ord Minnett expects there will be an announcement shortly in this regard, although it is not included in the broker's valuation. Longer-term, Macquarie incorporates a staged expansion of Wodgina with downstream conversion capacity in China.

FNArena's database has two Buy ratings, one Hold (Ord Minnett) and one Sell (Morgan Stanley). The consensus target is $53.75, signalling 36.6% upside to the last share price. Targets range from $41 (Morgan Stanley) to $72 (Macquarie).

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