After a 60% plunge in 4 months, are Mineral Resources (ASX:MIN) and its lithium peers on the rebound?

Mineral Resources (ASX:MIN) avoided much of the lithium price rout, until a few months ago. For investors, the company’s diversification and the hope that the downturn was a short to medium trend was enough to keep the faith. Yet the fact that prices went even more downhill in the first half of 2024 was a straw that broke the camel’s back for Mineral Resources which has had to cut jobs.

In the past week however, the company’s share price has taken a sharp turn in the other direction. As we will outline, investors think the worst of the lithium price rout is over, and that the company’s cost cutting plans will do the bottom line good.

Mineral Resources (ASX:MIN) share price chart, log scale (Source: TradingView)

Who is Mineral Resources?

The ASX 50 company provides mining services, but also owns its own mines, including lithium, gold and iron ore mines. It is even an investor in micro-cap explorers, with one example being lithium newcomer Kali Metals (ASX: KM1) and another Delta Lithium (ASX:DLI). It may not be held in the same regard as BHP, Rio Tinto and Fortescue, but perhaps it should.

Investors at Mineral Resources who attended the company’s AGM would’ve been greeted with a PowerPoint slide with Chris Ellison declaring ‘The past 12 months have been the most productive in MinRes’ history’. That statement may be up for debate, although there’s no doubt that FY23 was successful. The company increased revenues by 40% to $4.8bn and its operating cash flow by 383% to $1.4bn. It spent $1.8bn in capex and managed to generate a 6.7% Return on Invested Capital and close the year with $1.4bn in cash. It paid $1.90 per share. We are more impressed with its track record over 5 years. It has quadrupled its EV, grown its ROIC by 22% on average and made 44% in Total Shareholder Returns (TSR) per annum.

Source: Company 2023 AGM presentation

FY24? Not so much

The company has been a victim of the lithium price rout.

This has been the biggest of its problems, but not the only one. Others have been:

• Weak iron ore prices (coming just as the company begins iron ore exports from its new mine at Onslow) and high costs in the sector,
• Concern that Mineral Resources won’t be able to access US critical minerals subsidies because it does business with China and Mt Marion is co-owned by a Hong Kong-registered subsidiary of Ganfeng,
• Even if it can be accepted lithium prices will rebound, the fact that Mineral Resources will need to sell lithium on an auction platform rather than rely on individual contracts, and
• The company’s debt burden. It is $4.4bn right now, up from $1.9bn 12 months prior.

In June, the company announced it was shutting down its mines in the Yilgarn (in the south of WA), although it would look to redeploy workers in other mines. It has also announced cuts in its white-collar workforce.

At its FY24 results, the company decided not to pay a dividend for the first time in a decade. The company’s underlying net profit was only a fifth of FY23, at $158m, while its underlying earnings fell by 40% to just over $1bn. If it is any consolation, the company has not tried to sugarcoat things, with Chris Ellison admitting,’ It’s not a fun time to be in business’.

The only thing that spared Min Res’ group revenue from declining was its Mining Services Business.

Source: Company

Is there hope?

Perhaps there is. The 20%+ rebound in the share price last week suggests something happened. And it did. Min Res declared the market had bottomed. There were unconfirmed reports that China’s CATL suspended operations in Jiangxi. Obviously something has to give at some point if companies keep closing operations. And Jiangxi was not just any lithium mine but one of the few sources of lithium lepidolite, not to mention a big proportion of global supply.

All lithium stocks rallied last week, and Min Res executive Joshua Thurlow at a conference all but said this would be a key moment. UBS said so too, forecasting lithium prices could have as much as a 23% upside form this decision alone.

In other good news, the company is selling a 49% stake in the Onslow Iron dedicated haul road to Morgan Stanley for $1.3bn. At least $1.1bn of this will be received before the end of CY24. And the company’s latest cost-cutting measures will save $180m in capex and $120m in opex in FY25, not just through job losses but roster changes.

So while we’d like to see an upswing in lithium prices sustained over at least a couple of months before saying with confidence it is time to buy, there are some good signs in the market at long last.

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