Mineral Resources still a sell on debt burden, iron ore and lithium prices - Datt Capital

Not that long ago, Mineral Resources (ASX: MIN) appeared to have everything an ASX resources investor could want. Pilbara iron ore production. Tick. Energy transition exposure via lithium production. Tick. A mining services arm that boasts the who’s who of WA mining royalty as its customers. Tick.

In short: A company that produces minerals and earns money from helping others produce them – an ASX resources investor’s dream!

But, for many investors, that dream is rapidly turning into a nightmare as MinRes’ share price has plummeted from around $80 in May last year, to as low as $26 this morning after the release of its H1 FY25 results.

That share price journey has been punctuated by a plunge in lithium prices, subdued iron ore prices, alleged c-suite indiscretions, a burgeoning debt burden, and even bad weather.

The problem is, as specialist Australian investment manager Emanuel Datt of Datt Capital sees it, many of these problems continue to linger.

So, whilst many amateur ASX investors might be considering buying the dip on MinRes, Datt is sticking with his “Sell” call. I spoke with him about his thoughts on today’s results, as well as the outlook for MinRes and the market more generally.

Mineral Resources H1 FY25 Key Metrics

• Revenue: $2.29 billion vs consensus $2.015 billion
• Underlying EBITDA: $302 million vs consensus $212 million
• NPAT: -$807 million (includes $352 million post-tax impairment charges primarily related to Bald Hill, $232 million post-tax translation impact on foreign currency denominated balances) vs consensus -$279 million
• Dividend: No dividend declared as per consensus
• Guidance: Onslow Iron attributable volume reduced to 8.8 to 9.3Mt vs prior 10.5 to 11.7Mt and FOB Cost A$60to A$70/t vs prior A$58 to A$68/t; Pilbara iron ore maintained at 9.0-10.0Mt and FOB Cost A$76 to 86/t; Mt Marion lithium maintained at 150-170kdmt and FOB cost A$870-970/t; Wodgina lithium maintained at 210-230kdmt and FOB Cost A$800-890/t

What was the key takeaway from this result?

I think the one key takeaway from this result is that clearly this is a company still in transition. The company has had a strong investment thesis towards lithium, hence it was going around and collecting all these lithium assets. However, we've seen in this set of results the Bald Hill mine has effectively been mothballed and written down, so that's obviously affected the outcome in a big way.

The unresolved issue is, should the lithium market stay in the depressed state it’s presently in, then the big question mark for me is how this will affect the company’s remaining lithium production assets at Regina and Mount Marian etc.

In our opinion there’s no real fundamental bull case for lithium prices to rise for at least the next 12 months, so we're definitely not expecting any sort of dramatic help from this segment for MinRes in the short term.

There were some good points in the results, though. For example, I thought the Onslow ramp up met market expectations. Also, given the core competency of the company has always been in mining services, it’s pleasing to see that division appears to be firing in all cylinders.

Were there any surprises in this result that you think investors need to be aware of?

I think Mineral Resources has been pretty reliant on the ramp up of Onslow to meet market expectations, however some acts of God like the cyclones etc. have impacted the company meeting production guidance. There’s also been ongoing issues with the haul road that the company has highlighted, in the sense of upgrading what has already been built – possibly there’s some question marks over management’s previous downplaying of concerns over this item.

Would you buy, hold or sell MinRes off the back of this result?

SELL

Sell on the basis that we believe the fundamentals for the two core commodities the company is exposed to, iron and lithium, aren't going to improve in the short term. By short term, I mean over the next 12 months.

Are there any risks investors need to be aware of?

Our commodity views are the basis for our sell view, but the company’s growing debt burden is also a major concern. MinRes is now carrying around $5 billion or thereabouts in debt and it definitely adds to the risk given the market cap of the company is somewhere around that mark also.

Even if let's say hypothetically, the stock trades to $20 does that make it a less risky proposition given the debt? Perhaps to some degree, but I think it's really the debt load at present that’s the big risk element here, and management needs to be really focused on reducing that as quickly as possible.

From 1 to 5, where 1 is cheap and 5 is expensive, how much value are you seeing on the ASX today?

3 – Neutral.

I think that there are some sectors that look pretty heavy in terms of valuation, for example some of the large technology stocks like Pro Medicus (ASX: PME), but also stocks like Goodman Group (ASX: GMG) that have run hard on the data centres theme. The whole data centre angle is attracting a lot of money and weight of capital is pushing up valuations.

On the other hand, we're seeing other sectors that we're still finding plenty of opportunity in, primarily at the smaller end of the market. Here, I think resources has always been a stomping ground for us, and I'd probably also say there's a lot of opportunity still in smaller technology names that have been beaten down or have had issues, and financial services as well is looking prospective.

So, we're finding there's still that sort of bifurcation in valuations between large and small caps.