Reporting Season

In our recent article, we outlined our view that the mining services sector is well positioned heading into 2020 with investment in iron ore projects and other commodities expected to drive demand for contracting services.

Strengthening our conviction in this view is the release of Mineral Resources’ results today showing a particularly strong contribution from its mining services segment. In line with our investment process, we see MIN well placed to deliver on earnings expectations and run through the key drivers of this below.

Spotlight on mining services

Today’s earnings release from MIN saw EBITDA of $330m in the half, which positions the company well to meet or exceed consensus estimates of $645m for the full year. Mining services EBITDA of $172m for the half compares favourably to full year guidance of $280-300m and we would not be surprised to see the top end of this guidance range exceeded given the strong 1H20 run rate.

MIN’s contract crushing business delivered good growth, crushing 11% more tonnes than the previous period on an annualised basis. While MIN is an entrepreneurial company which has ventured into different business areas since IPO, the crushing division has always remained the core part of the group.

As we are very focused on short term earnings risk, we are keeping a close eye on the iron ore price over the next few months as we think this represents the biggest risk to achieving guidance. This is a risk in the sector overall for those exposed to iron ore production or construction, and MIN’s iron ore sales of 6.7mt for the half will need to be improved upon in the 2H to reach full year guidance of 14.5-15.5mt, however this has been well known to the market given the progressive ramp up in production at Koolyanobbing. Lithium earnings were depressed during the half given the weak lithium price, and we see little contribution from this division going forward until the lithium price starts to show some signs of life.

Batteries half charged

As an example of how lithium stocks are moving, the Global X Lithium & Battery Tech ETF has rallied 40% off its August 2019 lows but is still well below the highs reached at the peak of the lithium boom in early 2018. While we have yet to see lithium prices recover, the market is clearly looking forward to an expectation of improved market conditions later in 2020. In our opinion, an increase in the lithium price and restart of operations here could provide a catalyst for MIN, with the Albemarle joint venture and stake in the downstream conversion plant presenting key differentiators compared to other ASX listed lithium producers, providing the potential for better margins through the integrated supply chain.

Well-positioned for future opportunities

MIN’s results appear reasonable relative to peers in the space given the underlying strength and increased certainty around mining services earnings, an iron ore division well placed to deliver tonnes into a strong market, and optionality around a potential restart of lithium operations at Wodgina in the event of an improved price environment. The stock trades on an FY20 EV/EBITDA multiple of ~5x which is broadly in line with mining services peers and a 47% discount to the broader ASX Small Ordinaries Index.

With a heavy period of capital investment continuing and a net cash balance sheet, MIN is well placed to fund this investment into future growth, and a proven track record of positive returns from investments since IPO (average 21% return on invested capital since IPO in 2006), we expect this should drive further earnings growth in the future. With the track record that MIN has built and the investment opportunities ahead, we will continue to hold this stock.

More generally, we invest in stocks that we believe will deliver on medium-term earnings expectations. The mining services space is currently well placed in this regard, benefiting from a supportive macro environment, as the backdrop for global trade and commodities markets heading into 2020 appears supportive, along with improving earnings and attractive valuations in the sector. This is among the reasons we will continue to invest in a number of stocks in the sector.



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