Category: Financial Markets

Business Strategy and Outlook

Mineral Resources grew significantly following listing on the Australian Securities Exchange in 2006. Demand for crushing and screening services grew strongly with iron ore output from the major Western Australian iron ore miners. Cost inflation encouraged large mining companies to outsource capital-intensive, lower-returning processes. Mineral Resources also rapidly expanded its own iron ore mining business, though lacking the integrated rail and port infrastructure of major competitors and at a competitive disadvantage. More recent diversification into lithium production at Mt Marion and the Wodgina mine has sustained earnings momentum. 

The financial record to now is impressive and the balance sheet is unleveraged. Mineral Resources has diversified its earnings streams and improved financial disclosure. In fiscal 2010, the company was a mining service provider and minerals producer as now. But disclosure extended to just iron ore production tonnage, and segment earnings. Mining Services and Processing contributed 96% of group EBIT. Step forward to fiscal 2020 and Mineral Resources has materially improved its level of financial disclosure, and the greater depth of clients and number of project sites also reduces risk. We think the business model is demonstrably sustainable. The volume-linked crushing and screening business should be somewhat more resilient to commodity price weakness.

Mineral Resources’ mining services business builds, owns, and operates crushing and screening plants on behalf of mining customers. Despite contributing only 40% of group EBIT, Mining Services is core. Twelve 5 to 15 million tonne per year crushing and screening plants are owned and operated on 12 sites. Clients substantially include the largest mining companies and contract books have been renewed over time leading to volume growth. Power is supplied by mining companies and margins are comparatively stable. Bolstering growth in the core business centred on mining services around Australian bulk commodities, Mineral Resources will selectively own and develop its own mining operations, with the aim of subsequent sell-down while retaining core processing and screening rights.

First-Half Earnings Evaporate for No-Moat Mineral Resources. Despite This, FVE Upped to AUD 47.30

Group revenue fell 12% to AUD 1.4 billion reflecting a sharp 40% drop in realised iron ore price, only partially countered by improved lithium pricing and higher mining services volumes and revenue.Underlying first-half NPAT collapsed to a loss of AUD 36 million against a previous corresponding period, or pcp, profit of AUD 430 million. Despite this, Morningstar analyst increased its fair value to A$47.30 as they don’t think the drivers behind the first-half earnings miss affect the longer-term outlook, and time value of money is an ever present tailwind.

Financial Strength

Mineral Resources is in reasonable financial health. Albemarle’s acquisition of a 60% stake in Wodgina lithium instantly expunged net debt in first-half fiscal 2020, from a net debt position of AUD 872 million at end June 2019. But strong net cash outflows in first-half fiscal 2022, including high costs associated with COVID-19, see the net cash balance deteriorate to an AUD 583 million net debt position as of December 2021 . The current circumstance is unusual and a return to the normal territory is expected for Mineral Resources, which operated in a position of little to no net debt for at least the eight years to fiscal 2018; a sensible position for a company operating in the volatile mining services space. Mineral Resources had faced the key question of what it should do with its cash, with a shrinking pool of growth and investment opportunities in a lower iron ore price environment. A failed investment in Aquila Resources in 2014 attempted to leverage Mineral Resources into Aquila’s West Pilbara Iron Ore Project, and was symptomatic of where Mineral Resources found itself. Booming lithium markets directed the investment decision.

Bulls Say 

• Mineral Resources grew strongly since listing in 2006. The chairman and managing director have been with the business for over a decade and have meaningful shareholdings. 
• Australian iron ore is mainly purchased by Chinese steel producers, meaning Mineral Resources offers leveraged exposure to Chinese economic growth. 
• Mineral Resources has a recurring base of revenue and earnings from processing infrastructure.
• Mineral Resources’ balance sheet is very strong with net cash. This has opened up the opportunity for lithium investments selling into highly receptive markets.

Company Profile

Mineral Resources listed on the ASX in 2006 following the merger of three mining services businesses. The subsidiary companies were previously owned by managing director Chris Ellison, who remains a large shareholder despite selling down. Operations include iron ore and lithium mining, iron ore crushing and screening services for third parties, and engineering and construction for mining companies. Mining and contracting activity is focused in Western Australia.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.