Has the most hated company on the ASX 200 bounced back?

Simonelle Mody | Morningstar Australia

I last wrote about embattled miner Mineral Resources about 3 months ago, after worries over its balance sheet and lower near-term iron ore and lithium prices sent the stock price tumbling over 70% in 12 months.

It now appears that MinRes is in the midst of a turnaround story after soaring 40% since my last article. A recent activity updated has affirmed fiscal 2025 guidance for volumes and costs has been achieved across all segments with a solid fourth-quarter performance.

Mineral Resources Ltd MIN ★★★★

• Fair Value Estimate: $58.00
• Share Price: $29.86 (as at 1/08/25)
• Moat Rating: No moat
• Uncertainty Rating: Very High
• Price to Fair Value: 0.51 (Undervalued)

Activity update

The most notable development in the Q4 FY25 update is that the joint venture project, Onslow Iron, has turned cashflow positive. Furthermore, meeting volume and cost guidance lends comfort to our view that the company can continue to reduce its substantial net debt figure by ramping up projects in line with our expectations. Net debt has also marginally come down to $5.35 billion from the previous quarter.

Financial health still stretched

Given the volatility of lithium and iron ore prices, debt levels need to be watched.

Net debt at 30 June 2025 is expected to be c. $5.35 billion, down from $5.4 billion in the previous quarter. We do not expect gearing to be back to a more palatable 60% before fiscal 2030, unless an equity sell-down in an asset like Onslow accelerates deleveraging.

A lack of near-term debt maturities and financial maintenance covenants means the company will likely be fine in the near-term. However, it might struggle to refinance without a large equity raising if these products are struggling when debt beings maturing in 2027. Around USD 1.3 billion matures in 2027 followed by another USD 1.1 billion in 2028.

Mining business not moat-worthy

In respect to iron ore, MinRes sits at the highest quartile of the cost curve. Lower margins primary result from price discounts from selling a lower-grade product in contrast to the 62% iron ore benchmark. The accelerating production from 35 million ton Onslow iron ore mine is considerably lower cost than existing smaller operations. But even so, the approximate 58% grades will leave MinRes in the top half of the cost curve with margins below industry leaders like BHP, Rio Tinto and Vale.

Recovery in electric vehicle demand is supporting MinRes’ growing lithium production and is favourable for diversification. But this comes with unique risks. Australia’s hard-rock lithium mines are not the lowest-cost lithium sources, however lithium spodumene is a low-cost source of lithium hydroxide, important for batteries. MinRes’ mines on balance gravitate to the top half of the hard-rock cost curve, with near cash breakeven at USD 920 per metric ton spodumene prices.

What we think

Morningstar analyst Mark Taylor believes that the market appears to be pricing in limited recovery in lithium prices and a high like risk of dilution to equity given their debt position. We think the debt risk remains however the odds of a materially dilutive equity raising are falling.

Although the possibility of dilution, albeit reducing, is still reflected in the Very High Uncertainty Rating and partially in our fair value estimate of $58 per share. We ascribe a 25% chance of MinRes raising $2 billion equity at $15 per share. This would increase shares on issue by 70% to 330 million but reduce gearing to 40% and net debt/EBITDA to just under 2x from current levels of ~8x.

An alternative solution is that the company could sell assets to lessen or even prevent an equity raise, much like the Onslow haul road – 49% of which was sold for $1.3 billion last year. Taylor reiterates that this doesn’t mean the MinRes is out of the words. Our fair value estimate assumes lithium prices recover to near USD 1,700 per metric ton by calendar 2027 against June quarter levels near USD 660.

Our $58 fair value estimate assumes a five-year EBITDA compound annual growth rate (“CAGR”) of 33% by 2029. The high CAGR reflects the ramp-up in Onslow iron earnings and our assumed more-than-doubling in lithium prices.

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