Life after 40 - Time to go overseas?

Yilgarn

The Yilgarn hub consists of infrastructure at Carina and Koolyanobbing. MIN is currently in the process of finalising a 10 year mine plan that includes Koolyanobbing, Parker Range and Mt Richardson. Planned capacity for the hub is 13Mtpa.

Valuations of Existing Operations

Source: Chester Asset Management, Mineral Resources Announcements

Ashburton

The latest with regards to the Ashburton iron ore project is that it is anticipated to be construction ready in August 2021 with a 2 year development (so first production 2H CY23). The project hub has been earmarked as 25-30Mtpa. The key sources of supply for Ashburton are Bungaroo South and Kumina.

Notably, recently a subsidiary of MIN has also bought a 15% stake in Aquila resources that has a 50% stake in the Australian Premium Iron JV. I.e., MIN now has effectively 7.5% of the API project. Baowu owns 42.5% while US company AMCI and South Korea’s POSCO each own 25% of API. The key project of the JV is the 40Mtpa West Pilbara Iron Ore project. It was reported MIN paid AUD10m for the stake which also gives them exposure to Eagle Downs Coking coal project in QLD and Manganese assets in South Africa. We watch with interest how this asset may play into the strategies around Ashburton and Southwest Creek.

Southwest Creek (SWC)

In our previous note we provided a model for a 20Mtpa Marillana operation. Since then, MIN announced the desire for the business to be a 40-50 Mtpa operations consolidating more than just Marillana but also Ophthalmia and other stranded deposits. MIN has also announced that farm in agreements under the JV with Brockman had been satisfied and the JV had been amended(4) to include the Ophthalmia Project. Hence at least half of the SWC is proposed to come from Marillana/Ophthalmia.

MIN are still competing for berth rights (3 and 4) at Southwest Creek which are reserved for emerging / junior iron ore miners. Although there is no guarantees around access there are certainly other options if they aren’t successful in securing rights. Hence we are surprised to see little value reflected in analyst valuations for the project.

Valuations of Growth Projects

Our valuations for Ashburton and SWC are summarised below. Notably capex is a key area of uncertainty however we have provided analogues below to drive our assumed capex figures.

Source: Chester Asset Management with input from BHP, RIO and MIN announcements

Source: Chester Asset Management, with input from various ASX announcements

Mining Services

Per our analysis the market seems to be pretty consistent (now) in how they value MIN’s Mining Services division at ~6-7x EBITDA. We continue to believe a higher multiple is warranted given: the sticky nature of the business, the IP in their crushers and the greater portion that is effectively locked in for life of Mine Operations. However, we use 6x EBITDA as our base and 8x EBITDA as our upside case within our valuation.

Certainly, one of the key areas we had noted in our last note, being the market not recognising the earnings growth of the segment, has played out as MIN’s has delivered material growth and even softly upgraded the ‘guidance’ on the division to a doubling of production for calendar year 2019 within 3 years.

Source: Mineral Resources FY2020 Results Presentation

As we previously noted historic analysis of MIN’s half year results suffer from variability from: intersegment transactions and undefined construction earnings meaning EBITDA margins and revenue aren’t reliable without stripping this out. Hence, we feel it most appropriate to consider the ex construction EBITDA attached to production for a reasonable indicator of past earnings and what that could mean for future earnings.

Source: Chester Asset Management, with input sourced from MIN half year results

Hence assuming reasonably consistent EBITDA margin we calculate the guidance implies ~AUD585m EBITDA at end CY22 (from annualised AUD460m 1H FY21). We believe this to be exclusive of both the key iron ore growth projects and any international deals that could be struck (refer below).

We have rolled forward and updated our assessment of what the 2 key growth projects could deliver in sustainable EBITDA for the Mining Services division below.

Source: Chester Asset Management, with multiple input sources

Mining Services - International Opportunity

Maybe it is just us but we are quite excited about the potential for MIN to take its crushing capabilities overseas. As a reminder the NextGen 2 Crusher is IP of MIN. MIN recently signed an agreement with Metso Outotec (“Metso”), whereby Metso will market the crushers internationally, however they still do not have the ability to sell plants without MIN’s agreement.

The benefit of the NextGen Crushing plants are:

• They are portable – and can be relocated which makes them extremely useful for smaller or more isolated locations
• Lower capex and opex – Not having to lay a fixed slab of concrete provides one of the key benefits and being assembled in modules means the majority of construction can be performed at a location with labour cost advantages to WA
• They are quicker to have in place – Wonmunna achieved first ore within 5 months of the project commencing

In addition to Wonmunna, one of the new NextGen 2, 12Mtpa crushing plants has recently been commissioned at BHP’s Mt Whaleback mine.

Source: MIN Site Tour presentation April 2021

Some investors may look at the potential for MIN to go overseas as potentially risky but there would be ways to strike commercial terms that would not involve operatorship, such as:

• A sale of the plants to Mesto and Metso operate the plants
• A royalty arrangement that would see MIN leveraging the IP without taking on the execution risk of operating overseas

Additionally, if MIN were to retain operatorship they could be selective in jurisdictions such as avoiding certain parts of Africa.

What is the TAM of the international opportunity?

This is a tough question to answer given the information isn’t readily available but we have performed a crude analysis below. Global crushing appears a relatively competitive market with multiple operators. Research suggests that Sandvik is the leading provider with ~14% of a USD11bn market with Metso number 2(5). Given the portability and cost vs traditional options we don’t see why a Next Gen solution can’t start to represent a meaningful slice of the global crushing market.

Below we have conducted a theoretical exercise that conceptually estimates annual crushing additions outside of Australia at ~400Mtpa.

Source: Chester Asset Management with inputs from various sources

What could commercialisation look like?

Under a contractor model, assuming similar economics to the Australian operations, MIN 50% share and a build-up of 5 years on these contracts over a longer period we can see scenarios whereby the international opportunity can generate meaningful margin to MIN.

Source: Chester Asset Management

I.e. under these assumptions a 20Mtpa contract could generate AUD30m p.a. in EBITDA, MIN share being AUD15m but 1 of these p.a. for 5 years could mean cumulative AUD75m in recurring EBITDA in 5 years’ time.

An alternative to this model could be a sale of crushers for which MIN’s take a royalty. A hypothetical example of what this may look like is presented below.

Source: Chester Asset Management

We iterate both of these models are hypothetical and the international opportunity is at a very early stage. Management has not provided indication of the likely commercialisation model or LT potential.

Energy

The WA onshore energy scene has seen some excitement over the past 5 years and MIN hasn’t been too far off the scent. Recent discoveries such as Waitsia(6) and West Erregulla. indicate there is a lot of prospectivity in the Perth basin.

Like most things that they do MIN’s energy exploits aren’t a flash in the pan based on recent successes but part of an orchestrated plan to replace diesel with micro LNG for internal purposes and as a service to clients.

Source: Mineral Resources 2021 Investor Day

MIN has an enormous land package in the Perth Basin (7,300 sq km gross acreage) and North Carnarvon Basin (6,300 sq km). The difficulty for us trying to analyse it is that they haven’t really announced any leads or prospects. We do know that MIN has announced the potential to drill 2 wells in FY22 and 2 more in FY23. The first of these is targeting the Lockyer Deep prospect. We note you don’t normally drill wells without identifying a prospect first. The differential between Warrego and Strike Energy provides some insights into how the market is valuing the highly prospective Perth Basin Acreage, which we have used to impute a potential value for MIN’s acreage.

Chester Asset Management

We appreciate the market has more colour on STX upside via the key prospect of South Erregulla(7) but see no value being ascribed to MIN’s energy assets in market valuations.

Vertical Integration is the goal

Looking at MIN’s energy ambitions another way MIN has previously stated that diesel costs more than AUD140m p.a. Converting diesel to gas would materially reduce greenhouse gas emissions and ongoing reliance on 3rd party suppliers as well as save them money. In their FY20 sustainability report MIN notes total diesel consumed of 3.4 PJ. If we assume costs to the wellhead of ~AUD2.00/GJ for Perth Basin and AUD3/GJ for piping and conversion to LNG all in costs could equate to ~AUD5/GJ. The opex savings could exceed AUD120m p.a. based on FY20 energy requirements. Ignoring the cost of converting the transport fleet to micro LNG at 6x EBITDA this equates to ~AUD700m of value. Notably however with MIN’s growth ambitions future diesel requirements and savings would be significantly greater than the FY20 levels. Additionally if MIN were to make a material discovery we believe they would look to offer an integrated energy solution involving gas as an additional pillar within Mining Services.

Steady State Earnings

The following table represents our projection of the steady state EBITDA of MIN if the growth opportunities outlined in Iron Ore, Lithium and Mining Services are delivered within a 5 year timeframe. Cleary there are some immediate pressures around labour availability so this is a very hypothetical example but we thought worth highlighting the opportunity to develop MIN into a AUD3bn EBITDA p.a. business would clearly lead to a business much larger than the current AUD9bn market cap.

Source: Chester Asset Management

Keep on crushing it MINs

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(2) Assuming USD650/t real long term (LT) 6% spodumene prices.

(3) USD200-250m for 25ktpa of capacity for hydroxide

(4) Refer ASX announcement 23/4/2021

(5) (VIEW LINK)

(6) A reminder that in December 2017 MIN previously bid for AWE (for its 50% share of Waitsia)

(7) Identified as potentially connected to West Erregulla (Best estimate 1.6 Tcf gas with Geological Chance of Success at 57%)

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