All the makings of a monster

As previously reported in this column, lithium, a key ingredient in the booming electricity storage business, is Western Australia’s fastest-growing mineral export.

Less well known, however, is the identity of the fastest-growing lithium producer, a company mainly associated with its rock-crushing business and iron ore interests – the ultra-low-profile Mineral Resources.

Exactly how important lithium has become to a company run by one of Australia’s richest people, Chris Ellison, will become clearer over the next 12 to 24 months as the rising tide of lithium profits lifts Mineral Resources closer to a spot in the Australian stock exchange’s top 100.

As it stands today, Mineral Resources, with a market value of $2.2 billion ranks as the 125th biggest stock on the ASX, and eighth among WA-based companies, behind Northern Star, Seven Group, Iluka, South32, Fortescue, Woodside and Wesfarmers.

The increase in Mineral Resource’s share price from $9.22 as recently as June 23 to now trade around $12 is due almost entirely to the company’s embrace of lithium as a growth sector, neatly filling a gap left by tougher conditions in iron ore.

Lightly researched by investment banks and rarely open to media inquiries, Mineral Resources has very much run its own race; so much so that few small investors are familiar with the company, which had only 5,703 shareholders at its last balance date.

Research interest started to grow in June, but not smoothly, after analysts from Deutsche Bank published a report that praised the company’s lithium business, describing one of its assets, the recently acquired Wodgina mine in the Pilbara, as ‘a monster emerging’.

Originally an asset of tantalum-focused Global Advanced Metals, Mineral Resources bought Wodgina last year and rapidly expanded it to the stage where it moved 315,000 tonnes of direct-shipping lithium ore from Port Hedland in June alone, according to Deutsche Bank.

As well as the 100 per cent-owned Wodgina mine, Mineral Resources has a 43 per cent stake in the Mt Marion mine near Kalgoorlie (with the smaller Neometals a minority shareholder), and an 8.3 per cent stake in Pilbara Minerals, which is developing the Pilgangoora lithium project in the Pilbara.

The research by Deutsche Bank and that by another investment bank, Morgan Stanley, provide rare insights into Mineral Resources, with both banks having the firepower to have a significant effect on a company’s share price.

In June, shortly after Deutsche Bank’s ‘monster’ comment about Wodgina, Mineral Resources’ share price rose so sharply that The Australian Financial Review reported that corporate regulators became interested, but were satisfied that the market was fully informed.

The growing importance of lithium to Mineral Resources can be demonstrated in three ways.

• Firstly, because investors shrugged off a profit downgrade by the company in late June as it largely reflected earnings from the company’s traditional business units of mining services and iron ore mining, and did not incorporate the full effect of the growing lithium business.

• Secondly, because both Deutsche Bank and Morgan Stanley have calculated that profits from lithium will represent roughly 50 per cent of the annual earnings of Mineral Resources in the current financial year.

• Thirdly, because the tonnage of lithium being shipped out by Mineral Resources means it has become, in a matter of months, a rival to better-known lithium producers and project developers such: as Tianqi Lithium and Albemarle and their Greenbushes mine in the South West; Galaxy Resources and its Mt Cattlin mine; and Pilbara Minerals, Neometals, Lithium Australia, Altura Mining, and Kidman Resources.

Morgan Stanley’s latest research into Mineral Resources noted the downgrade in estimated pre-tax profit for the year ended on June 30, dismissing it as irrelevant, telling clients that: “The company’s mining services business and lithium operations are continuing to perform strongly.

“According to our forecasts, around 50 per cent of the company’s earnings before interest, tax and other charges are expected to come from lithium-related production from the 2018 financial year onwards,” Morgan Stanley said.

The price being received for lithium, which is sold in a variety of ways, has resumed its ascent after slowing last year. Mineral Resources and Neometals reported recently that the price for material grading 6 per cent lithium had risen by 12 per cent, to $US841 a tonne.

The cost of production for most WA lithium producers is believed to average around $US380/t, indicating that they are enjoying a gross profit margin today of roughly $US460/t if selling as a 6 per cent concentrate.

How long the current positive conditions remain in the lithium business is a critical question, but it is likely that a price correction will kick in after a series of new projects enter the market.

Until then, it’s very much a case of enjoying the boom while it lasts.