Balanced Portfolio - Mineral Resources & Liontown Resources
Date: 31/01/2024
*** GENERAL AVICE ONLY***
Trade Rationale
It’s been a rocky ride for Lithium so far this year but through all the noise, we see quality buying opportunities in the space for the long term. Mining giants Gina Rinehart and Chris Ellison have long track records in running profitable mining operations in literally the most abundant mineral on the planet, Iron Ore and they are aggressively buying into the next mining boom of Lithium. Why?
Long-term demand – The miners aren’t looking at the next 3 years, they are looking at the next 3 decades and want to position themselves early in the next essential mineral while diversifying their portfolios. Rio Tino recently commented on lithium being an attractive place to invest, saying “Market fundamentals for lithium remain strong as EV adoption continues to rise on supportive government policies and supply shortfalls requiring further investment”
Government support is in abundance – with the US “Inflation Reduction” Act and the Australian government’s “Critical Minerals Strategy” the financial support is flowing, and these established players were already well-connected
So while the lithium price has a huge amount of short-term noise, it is providing a buying opportunity in both Mineral Resources and Liontown which are both top tier operations
Mineral Resources
Mkt Cap: $11.75B
PE: 47.68
Yield: 3.16%
Despite the recent decline in Mineral Resources’ share price, primarily driven by the falling Spodumene Concentrate prices in China, we view the current valuation as an attractive entry point. Our optimism is underpinned by the company’s robust diversification strategy, particularly its significant involvement in the Iron Ore sector and Mining Services. Over the past year, the Iron Ore market has demonstrated considerable strength, and this trend aligns well with Mineral Resources’ operational focus. Furthermore, the resilience and performance of its Mining Services division add another layer of stability to its business model. Given these factors, we are closely monitoring market dynamics for an opportune moment to add to our position in Mineral Resources. We believe the company’s diversified revenue streams provide a buffer against the volatility in lithium prices, positioning it well for sustainable growth.
Financial Statement Performance
In the fiscal year 2023, Mineral Resources Limited (MinRes) exhibited excellent financial results, with notable increases in both revenue and profits. The company’s revenue rose by 40% to $4.8 billion. Its profit before interest, taxes, depreciation, and amortization (EBITDA) grew by 71% to $1.8 billion, resulting in a profit margin of 37%. MinRes maintained a strong financial position with a manageable debt level of $1.9 billion and a debt-to-EBITDA ratio of 1.1 times. The company also had a strong cash position, with $1.8 billion available, including $1.4 billion in cash.
The exceptional performance was largely due to significant earnings from their lithium operations, especially the Wodgina project and the expansion of the Mt Marion plant. The iron ore division also progressed well, with key developments like the Onslow Iron project.
Despite these successes, MinRes faced some challenges. Its net profit after tax was $244 million, a decrease of $107 million from the previous year. This decline was partly due to a $552 million reduction in the value of certain assets, mainly in the iron ore operations at Utah Point Hub and Yilgarn Hub, owing to revised ore estimates and higher operating costs. However, the company still managed to maintain a strong cash flow from operations at $1.8 billion, effectively converting all its EBITDA into cash.
Business Segment
- Mining Services: This segment focuses on providing a range of services to the mining sector. It includes activities like mine planning, engineering, project management, and on-site operational support. This service-oriented arm supports the broader mining industry with its expertise and capabilities in managing and executing mining operations.
- Iron Ore: This segment is dedicated to the exploration, extraction, and processing of iron ore. It’s a core activity of the group, involving the mining of iron ore reserves and the production of iron ore products for sale. This segment is crucial due to the global demand for iron ore in steel manufacturing and other industrial processes.
- Lithium: This segment is centered on the extraction and processing of lithium, a key component in rechargeable batteries and other modern technologies. Given the growing demand for lithium in the production of electric vehicles and electronic devices, this segment is particularly significant in the context of the evolving energy and technology landscape.
- Energy: This pillar encompasses the group’s activities in the energy sector. It likely involves the exploration and production of energy resources, such as natural gas or renewable energy sources. This segment is crucial for meeting the energy requirements of the group’s mining operations and potentially for supplying energy to external markets.
Current holding 4% – Balanced Portfolio
Increase to 6% of Balanced Portfolio
Entry: <$60.5 | Target: $78 | Stop: $50
Liontown Resources
Mkt Cap: $2.48B
LTR has been sold off after a failed take over and falling lithium prices in 2023. We have seen price as low as 88c or $2.2B market cap. Usually a fall in price like this is to be avoided but looking at the bigger picture we see plenty of upside value for LTR from current levels. LTR’s Kathleen Valley project is more than 72% complete at the end of 2023. Project remains on budget and scheduled for first production in mid 2024. KV is considered a globally significant tier one deposit with a mine life greater than 20 years. Which is why players were keen to take over the asset at $3 in 2023.
Total Allocation – 1.5%
Entry: <$1.03 | Target: $2.3 | Stop: $0.75
Disclaimer: The recommendation given is general advice only. It does not take into account your personal objectives, financial situation, or specific needs. This information should not be your sole resource when making such decisions. We strongly recommend you to seek the advice of financial, taxation, and legal professionals before finalising any investment decisions.