Mineral Resources: Foundation laid for next stage of growth
Mineral Resources Limited’s 1st half was uncharacteristically subdued, with revenue, EBITDA, NPAT and dividend all down on the prior corresponding period, and in some cases by a significant margin. Being long-term followers of MIN, most of this was already factored into our models and was consistent with prior management guidance.
However, Mineral Reources' (MIN) traditional engine room – Mining Services – was ~15% weaker than our estimates and ‘Central Costs’ were double our forecast, albeit we believe this includes a stock build which will yield value in the coming half. Only iron ore beat our estimates, but the bar was set very low in our model with a +$3m EBITDA contribution versus our expectation of a $15m loss.
For the uninitiated, the drop in dividend from 25c to 13c along with the collapse in operational cash flow by 90% to $21.6m, is likely to have caused some consternation. Further, the increase in net debt to a record $653m would also have caused some concern amongst the hordes of desktop analysts. Indeed, this was evident in the initial reaction, where the stock price traded down more than 10% at one point, before firming to close the day with a more respectable decline of ~5%.
Core thesis remains intact and on track
The first half of the 2019 financial year was always slated as being one of significant capital investment – on a scale that in some respects was even brazen for the likes of MIN. Along with significant expenditure on Mt Marion and Koolyanobbing, MIN has been building the largest hard rock spodumene mine and processing plant anywhere on the planet. Additionally, it has been designing and procuring long-lead items for a downstream lithium hydroxide operation – potentially a billion dollar plus undertaking.
When combined with the cessation of DSO operations out of Wodgina, this half was always going to look ‘ugly’ on paper. But whilst our view and forecasts may have changed around the margins, the core thesis remains intact and on track.
In short, the 1st half result was all about the past, and what we are focussed on is the future and what MIN is capable of earning in coming periods.
One of the true success stories of the decade
So what might the market be missing and why do we retain our positive outlook for MIN?
Firstly, in the short-term, the devastating tailings dam failures in Brazil have put a rocket under the iron ore price, which was marginal for MIN in the first half. If we roll through spot pricing for the remainder of this financial year, we could see the iron ore division generate EBITDA of $100m - $150m – a substantial upgrade. In the short term, we are also likely to see a rebound in the Mining Services division, with MIN management highlighting an additional 35mtpa they are tendering for.
Secondly, the market seems to have forgotten that MIN has signed an unconditional agreement to sell half of just one of its assets – Wodgina – to one of the world’s largest Lithium producers Albemarle for US $1.15bn ($AUD1.6bn). Whilst the timing of receipt of funds is uncertain, these proceeds will completely expunge MIN’s entire debt and leave it with a war chest of ~$500m.
Thirdly, the market seems to be undervaluing the significant cash flow and earnings that will accrue from the imminent commencement of production of spodumene at Wodgina. On a steady state basis, we believe that this can be in the order of $150m-$200m per annum for 30+ years.
And finally, over the longer term, MIN is developing a lucrative lithium hydroxide operation and has a pipeline of mining and technology assets.
Whilst it often flies under the radar, MIN has been one of the true success stories over the past decade. Since listing in July 2006, MIN has grown EBITDA from $38m to $575m in the 2018 FY. During the first half of 2019, the foundation has been laid for the next stage of growth.
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Katana Asset Management was founded in September 2003 as a boutique investment management firm. Katana employs an all opportunity investment mandate being style, sector and market cap agnostic.