BUY HOLD SELL – Mineral Resources (ASX: MIN)Mineral Resources (ASX: MIN) is more than your average miner with a few divisions under the umbrella. It recently presented at the Bank of America mining conference and highlighted that it is a leading pit-to-port mining services provider, a top-five lithium miner with joint ownership of the largest hard rock lithium deposit, and the fifth-biggest iron ore producer in Australia. The presentation was basic and to the point, setting out the five-year plan neatly. The market responded positively, sending the share price more than 3% higher on the day. The aim for MIN’s lithium operations is to convert all spodumene to hydoroxide, an increasingly favoured compound that allows greater energy storage and better range in electric vehicles. The company sees iron ore production growing from 20mt per year to 90mt. It has ambitions to grow crushing contracts with external mining companies and is looking to pursue natural gas opportunities to help replace its need for diesel, a move that will help it reach net zero emissions by 2050. Its March quarter report revealed iron ore production of 4.9mt, shipping 4.1mt at an average price of US$145. Of concern, however, was a miss on its haulage goals, pointing to a shortage of truck drivers given border closures. Uncertainty surrounding that issue leading to a revision to shipping guidance. On Tuesday, JHX and SBM also warned of cost pressures and lack of suitable staff, especially in WA. A tighter labour market, even with relaxed restrictions, keeping that issue alive, whilst unemployment numbers out yesterday fuelled that concern. Frustration for management is growing on the back of delays in securing WA government approval to develop new berths in Port Hedland, discussions understood to be ongoing since 2018. MD Chris Ellison is reportedly now preferring road trains, but he’d prefer them even more if he had enough drivers. On a positive note, MIN is reportedly gaining momentum in its ambition to unlock stranded iron ore assets in WA, through a joint venture with Brockman Mining. On the lithium front, operations at Mt Marion are believed to be on track to meet or beat guidance for FY21. Construction of the Kemerton Lithium Hydroxide Plant, which is a JV with Albemarle, is on track for completion in the second half of the year. Also of interest is the recent $4bn merger of lithium miners, Orocobre and Galaxy. While some of the hype and headlines have quietened down, the moved has stoked speculation about further consolidation in the sector. On top of the higher AUD which is making our commodities a bit pricey, there has been increasing chatter about China’s push to put a cap on prices which has taken some of the froth off commodities. Newswires have been reporting China will lift domestic production and look for other sources outside expensive Australian seaborne iron ore. BHP CEO Mike Henry downplayed concerns at the Bank of America Conference, saying “the outlook for commodities is compelling.” Main Observations:
- A nice-looking set of numbers on first inspection.
- ROE of 40.2% is exceptional, but we in the finance world like consistency. Forecasts see it back at 26.5% and then 16.6% in FY22 and FY23 respectively. The predicted negative trend taking a bit of lustre away from current figures
- Revenue and EPS both expected to improve this financial year but in a similar pattern to ROE, estimates see it edging lower in FY22 and FY23.
- A PE of 7.8x is impressive, peers in GXY and sit on multiples of 155.6x and -318x, bigger miners in FMG and BHP sit on 6.1x and 12.3x, so its up there with the best of them
- A gross yield of 8.6% well ahead of the market average of 3.8%. The question though remains is for how long can that yield last?
- Half of the brokers surveyed by Thomson Reuters have a buy or strong buy recommendation. ~38% have a hold recommendation.
- It is sitting at a 2.2% premium to the average broker target price and a 54.5% premium to intrinsic value