Australia | Sep 13 2022
This story features MINERAL RESOURCES LIMITED, and other companies. For more info SHARE ANALYSIS: MIN
Mineral Resources is considering a spin-off of its lithium business to a US listing, which brokers agree would unlock significant trapped value.
-Mineral Resources looking to spin off lithium business
-Significant value trapped in group structure
-Only under consideration for now
By Greg Peel
The Australian Financial Review has reported Mineral Resources ((MIN)) is considering a spin-off of its lithium division to a listing on the New York Stock Exchange. The company had not yet disclosed this information to the market as potential strategic initiatives being considered are not sufficiently advanced or certain to warrant disclosure.
But now that the cat’s out of the bag, brokers agree the true value of Mineral Resources’ lithium operation is being lost in the company’s conglomerate of iron ore, mineral services and gas businesses at a time standalone lithium miners are enjoying the full benefits of growing lithium demand.
Indeed, on Credit Suisse’ valuation the four businesses as a whole are currently trading at the price of just the lithium business alone.
Mineral Resources sees its lithium operation as a longer term growth driver, and hence would retain a controlling shareholding in any spin-off. Let’s call it LiCo for now.
But as Morgan Stanley points out, in the near term the company has a significant capex program underway in the iron ore division, including a recently flagged $3bn for Ashburton and an estimated $640m for South West Creek.
The intention was to fund this spending from cash flows generated in its lithium business, and to a lesser extent its other businesses, thus any spin-off plan could be delayed by these capital needs, unless they are met through capital raises (either debt or equity).
That said, combining Mineral Resources upstream and downstream businesses provides a valuation equivalent to an FY23 enterprise value to earnings multiple of 1.7x and an FY23 price/earnings multiple of 2.7x, and 3.8x and 5.5x for the same numbers in FY24, on Morgan Stanley’s forecasts.
Combining the broker’s forecasts for Australian lithium players Allkem ((AKE)), IGO ((IGO)) and Pilbara Resources ((PLS)) nets out to equivalent FY23 numbers of 5.4x and 9.8x, and FY24 of 7.1x and 14.4x.
These multiples are still below those of integrated lithium players listed on the NYSE, which have a 2023 enterprise value to earnings of 10.4x and PE of 15.4x, and 2024 numbers of 13.8x and 22.5x.
So you can see the attraction.
UBS is assuming a spin-off could lift LiCo’s enterprise value to earnings multiple to 6x, implying an 86% increase. This compares to 10x for Albemarle – US-based lithium leader.
This broker assumes a premium for Albemarle due to the extent of its global operations, which includes a 50% interest in Wodgina (Mineral Resources 50%) and 50% in Greenbushes (processes IGO’s ore) which are the number one and two operating hard rock lithium mines globally.
Albemarle also has interest in Chile's Salar de Atacama, seen as the world’s best lithium brine asset, and in a portfolio of low-cost Chinese refineries, and in Kemerton WA (Mineral Resources has an interest) where refining capacity is being ramped up.
Assuming Mineral Resources retained over 50% of LiCo, and following recently announced updates to its lithium business structure, UBS assumes new investors would receive some 25% of Wodgina, 25% of Mt Marion, 25% of Mt Marion downstream (operating), 25% of Wodgina downstream (not yet built) and 7.5% of Kemerton.
By assuming a larger multiple for LiCo of 7.7x to bring it into line with listed US peers, Credit Suisse suggests LiCo could be worth $122 per share. Assuming a more conservative global average of 6.2x would still imply in excess of $60 per share could be unlocked.
Mineral Resources is currently trading at $74.89. Credit Suisse has an Outperform rating and target of $75.00. UBS has a Buy rating and target of $83.00.
Morgan Stanley curiously has an Overweight rating with a target of $64.80.
Yet to comment on the spin-off news are Citi (Buy, $76) and Macquarie (Outperform, $100). The average of all five covering brokers’ targets is $79.76 and each has a Buy-equivalent rating.
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