Brokers still love two of these troubled miners: Liontown, South32 & Lynas Rare Earths

Three popular resources companies featured heavily in today’s Broker notes. Liontown Resources (ASX: LTR), South32 (ASX: S32), and Lynas Rare Earths (ASX: LYC) have been in the news regularly lately due to concerns over falling commodity prices, production delays, and for Liontown, ownership shenanigans. Here’s a summary of what the brokers had to say about the troubled trio.

Liontown Resources (ASX: LTR)

Catalyst: Project and Funding Update

Summary

Liontown confirmed the Kathleen Valley Lithium project is “on-track for first production” circa middle of this year. Whilst it is fully funded to production, the original $760 million debt funding package with a syndicate of lenders is now unlikely to proceed due to “recent reductions in the independent forecast pricing for spodumene upon which the lenders' credit approvals were based”. Liontown is now looking to negotiate a “revised, smaller debt facility”.

Broker views

Jarden

• Broker suggests increasing scrutiny will fall on Liontown’s balance sheet as weaker lithium minerals prices, and rising costs come into focus
• Believes Liontown has “sufficient liquidity” to achieve commercial production
• Broker’s previous long term spodumene price estimate of US$1,400/dmt now looks “optimistic” versus current spot pricing around US$900/dmt
• Broker is “comfortable” their forecast lithium pricing will recover “over the medium to long term”
• Valuation comes down due to “lower short-term commodity prices” as well as changes to cost of capital assumptions
• Notes Kathleen Valley valuation of $1 per share in isolation
• Retained at “Sell”; Price Target: $1.19 from $1.40

Goldman Sachs

• Cash on hand is sufficient to get to production
• Timing of achieving positive cashflow pushed out to the second half of FY25 due to lower spodumene pricing
• Liontown could require a further $200 million funding, but if spodumene prices continue to fall, this could be more like $300 million
• Liontown is trading at a 25% discount to the brokers lowered calculated net asset value assuming a spodumene price of US$950/t, this compares with peer average in-line with respective valuations
• Possibility of “further uncertainty” due to funding and continued declines in spodumene price

• On broader ASX lithium sector:

• Sees prospect of “further price declines”, sector is likely to increasingly trade at net asset value discount.
• Spodumene market is “yet to see a meaningful supply response”
• Retained at “Neutral”; Price Target: $1.45 from $1.65

Citi

• Sees prospect of a “potential funding gap” due to low spot spodumene price, low cash, working capital requirements
• Cuts production estimates by 3mt/pa
• Plenty of uncertainty due to opex, “funding uncertainty”, low spodumene price, and impact of “strategic shareholders”
• Retained at “Neutral”; Price Target: $1.00 from $1.35

Bank of America

• Downgraded to “Neutral” from “Buy”; Price Target: $1.20

South32 (ASX:S32)

Catalyst: Quarterly Report December 2023

Summary

Group copper production guidance reduced by 3%. Operating costs in-line with guidance. Second half FY24 production growth target of 7% reiterated.

Broker views

UBS

Described December quarter production result as “soft” due to reduced alumina guidance, higher tax, “adverse” working capital

Cost profile appears “balanced”

Earnings to improve “materially” in the second half of FY24 as improved alumina, coking coal, copper and manganese markets contribute

Cuts FY24 earnings estimates by 31%

Retained at “Buy”; Price Target: $3.80 from $4.00

Goldman Sachs

December quarter production was “slightly weaker than expected”

Only S32’s Cannington zinc, lead and silver mine beat the broker’s production expectations, other 10 operations missed

Sees S32’s guidance on costs to be in-line with or below Fy24 guidance as important

Cuts FY24 earnings per share estimate by 4%, but increases FY25 by 1% and FY26 by 3%

Notes valuation is “attractive” with S32 trading at a 5% discount to the broker’s calculated net asset value

Retained at “Buy”; Price Target: $3.80

Citi

December quarter production was “weaker than expected” due to coal production

Cuts FY24 underlying profit estimates by 32% to $293 million, dividend cut 30%

FY25 and FY26 earnings only small reductions by circa 1-2%

Retained at “Buy”; Price Target: $3.60 from $3.70

Morgan Stanley

Aluminium production “broadly in-line”, but sales and shipments below expectations, manganese shipments 6% higher than expected, silver and lead sales 20% and 11% better than expected, nickel shipments 6% below expected

Notes strong balance sheet and “significant discount to valuation”

Retained at “Overweight”; Price Target: $3.85

Lynas Rare Earths (LYC)

Catalyst: Quarterly Activities Report

Summary

NdPr production was lower due to temporary shutdown at Lynas Malaysia for upgrade works. Resulted in a significant drop in sales revenues. Mt Weld exploration drilling program successfully completed. Mt Weld maintained steady operations at 80% of nameplate capacity during the quarter.

Broker views

UBS

• NdPr pricing around US$50/kg is well below broker’s 2024 estimate of US$75/kg and long term price estimate of US$95/kg
• Lynas is ramping up capacity at a time when price cycle is turning down, may cause a rethink if prices remain low
• Broker’s sources suggest demand for rare earths remains robust, possibly growing around 25% in 2024, but Chinese suppliers lack “supply discipline”, aiming to retain market share
• Retained at “Buy”; Price Target: $9.20

Goldman Sachs

• December quarter result was “broadly in line” with broker’s estimates, rare earth oxide sales were ahead of expectations
• Notes Malaysia upgrade completed in “record time”
• Higher sales offset by “+30% QoQ increase in cash costs”, though
• Cash estimated to be $515 million at 2023 year end, to “bottom out” at circa $130 million by end of year
• There are “a number of complex challenges to work through in the ramp-up” at Mt Weld, possible three to six month delay
• NdPr pricing to be “balanced over medium term but deficits over long run”, expects US$75/kg in 2024 vs current spot price around $US55/kg
• Lynas is trading at a 20% discount to broker’s calculated net asset value
• Retained at “Buy”; Price Target: $7.50 from $7.70

Citi

• Modelling suggests Lynas is “lossmaking in FY25 on spot NdPr VAT excl. prices of ~US$50/kg”
• China construction downturn / weak demand main cause of “subdued” NdPr prices
• “Weaker than expected EV demand” and “challenges” faced by wind turbine companies other major contributing factors to lower market pricing
• Longer term, as EV and wind switching increases due to push to meet emissions targets, broker remains “constructive” on NdPr outlook.
• Downgrades FY24 - FY26 earnings by 59% to 22% due to NdPR price downgrades by 10-20%
• Retained at “Neutral”; Price Target: $6.70 from $7.20

This article first appeared on Market Index on 23 January 2024.