Mineral Resources (ASX code – MIN) is a large Australian Iron Ore producer and contract miner. With iron ore down over 50% from the peak prices a few months ago, and a poor outlook for property development in China, it is not surprising that MIN has taken a hit.
Last year MIN shipped 17 million tonnes of iron ore generating EBITDA of $1.5 billion. However, Iron Ore is only part of the Mineral Resources story. Chris Ellison, the well regarded CEO of MIN, is also the founder of three of the core companies that make up the group, and clearly has operational as well as entrepreneurial skills. MIN started life as a mining services contractor, and over time became owner of various iron ore mines. The 17 million tonnes shipped last year will likely grow to about 55 million tpa by 2026. In the mining services segment of the business, EBITDA last year was $420 million, and is likely to grow to about $500 million this year.
Last year MIN had pre-tax net profit of $1.557 billion, on a market value of $7.5 billion. That makes the current share price 4.8 times pre tax earnings. Now the earnings are likely to drop this year and may be only half of the 2021 bumper year. However, the future earning power from third leg of the stool – Lithium, is where this company gets very interesting.
Emma Fisher, from Airlie Funds Management (a new subsidiary of Magellan Financial Group) is on record (via LiveWire Markets) saying that she believes within three years MIN will be producing as much Spodumene as Pilbara Minerals (PLS.ASX) and three times the amount of Lithium Hydroxide. Her estimate is that MIN is on track to eventually produce EBITDA of $1 billion per annum from Lithium products.
She then compares the FY2023 Enterprise Value / EBITDA multiples of other Lithium producers. The cheapest is Orocobre (ORE.ASX) at 11x. Then there is PLS at 12x. It goes up from there to Genfeng at 31x. If you believe that MIN can produce $1 billion in EBITDA from Lithium products in three years, then at the current market value of $7.5 billion, you are getting the Lithium at a bargain 7.5x and the mining services and iron ore assets thrown in for free.
As you can see from this, I am bullish on MIN, even though China anecdotes and iron ore prices may weigh on MIN in the short term. Macquarie have a $72 price target. The stock closed at $41.17 yesterday.
If you want to know whether Airlie (Magellan) are putting their money where their mouth is, they just lodged a substantial shareholder notice that shows they own more than 5% of MIN. I am buying MIN today in my SMSF.
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