Trade Action
Buy 300 MIN shares paying no more than $47.50
Stop loss: $35.50
Split profit target:
- 150 shares at $55.00
- 150 shares at $62.50
We are entering a new Mineral Resources (MIN) position again today. We most recently opened a position in MIN in late November 2021 and exited the last position on the 25th of January 2022 for a very nice profit.
The company reported Full Year 22 Half-year results on the 9th of February. The highlights
- Revenue down 12% to $1.4Billion
- Underlying EBITDA down 80% to $156Million
- Profit after tax $19.6Million down from $519.3Million in the PCP
As we expected, the sharp fall in the iron ore price led to a reduction in profitability. Moreover, the price received for the iron ore MIN sold was even lower because they produce an iron ore product with only 58% iron content that trades at a discount to iron ore with higher grades. As a result, MIN average iron ore price achieved in 1F22 was US$71.
The recovery in Lithium production and profitability partially offset the fall in iron ore profitability. But volumes in the Lithium business are still ramping up as MIN brings production back online.
We are opening a new position today because the iron ore price has recovered from a low of US$87 in November 2021 back to US$150 today, and discounts for lower grade iron ore have closed to more normal levels. In addition, the price of Lithium remains elevated, and the company’s mining services division is on track for 15% to 20% growth year on year over the next five years.
A lot to like, and we see no reason why the share price can not move higher over time.
Original trade recommendation for November
To gain exposure to iron ore and Lithium inside one company, we will today be opening a position in a slightly under-the-radar company in the mining sector. The company we are talking about is Mineral Resources (MIN).
MIN has been a listed company since 2006 and is still led by its founder and Managing Director, Chris Ellison.
The company has three areas of operation
- Iron ore
- Hard-rock lithium mining
- Mining services
The main area of interest to us is the Lithium mining business, but you can not look at this company without considering its different operations.
Iron ore
Australia’s 5th largest iron ore producer is from the Yilgarn hub (Parker Range) and Utah point hub (Wonmunna).
In full-year 2021 exports of 17.3Mt generated a record EBITDA of $1,537 Million. However, given the sharp fall in the iron ore price and the current high cost of production, this profit potential is not likely to be repeated in FY22.
Over the next few years, the continued investment will see the iron ore division transition from low-volume to high-volume, long-life producer.
Lithium Assets
- Mt Marion – Total production 475kt of production, MIN owns 50%, so its share of production is 235kt p.a
- Wodgina – Currently not in production operation in care and maintenance, targeting restart by third quarter 2022, initial production 250kt. Production increases overtime to 750 kt p.a. MIN owns 40%, so its share of production is 300 kt p.a
- Lithium hydroxide plant under construction at Kemerton ( 17km northeast Bunbury). The plant will process all spodumene from the Wodgina mine into lithium hydroxide.
Mining services
This business segment entails open pit mining, crushing, and processing across several different commodities such as iron ore and Lithium predominately.
Mining services contracts have a long time frame, typically over five years, and are not linked to commodity prices. As such, they consistently generated positive EBITDA in FY21 $420 Million, with this only likely to increase over time as commodity prices remain elevated.
In summary
When you compare the production upside potential from the Lithium assets, and the currently elevated spot prices for spodumene US$1,700/t and lithium hydroxide US$17,000, the Lithium division will start to generate significant profitability in the near term.
Along with the growth in earnings from the Lithium business, you also get the profits from the mining services business, which are not reliant on the underlying commodity price.
The opportunity to invest in the company at levels significantly below the recent high of $65 in late July exists because of the falling iron ore price. However, a sustained recovery in the iron ore price is unlikely until after the Chinese Winter Olympics in February 2022.