Chart of the Week: We see opportunity in Mineral Resources despite debt concerns
Shares trade at a discount despite attractive longer-term outlook.
Mentioned: Mineral Resources Ltd (MIN)
This week’s chart comes from equity analyst Mark Taylor’s stock pitch for Mineral Resources.
Market concerns may be overblown
Taylor believes the market worries debt levels have risen to unmanageable levels and a dilutive capital raising is on the cards. Capital expenditure has also dwarfed weak operating cash flows. Further to this, investors are concerned the lithium price may not recover with potential for oversupply if demand growth slows and EV-supportive policies unwind.
On the other hand, we think the worst of financial risk is behind. The average debt maturity has improved from three years to four years, with no material payments for two years.
Additionally, iron ore cash flows are growing with Onslow hitting capacity in August 2025. Mineral Resources has agreed to sell down equity in Wodgina and Mt Marion lithium mines for AUD 1.2 billion. We expect regulatory approval allowing a deal to proceed by first-half calendar 2026. Sell-down proceeds could rapidly repair the balance sheet reducing risk.
What we think
Our AUD 68 per share fair value estimate hinges on three key assumptions:
- Lithium price improves to over USD 21,600 per metric ton by fiscal 2028.
- Onslow achieves 38 million metric tons per year of iron ore production by fiscal 2027, with free onboard costs falling to USD 49 per metric ton and iron ore price holding above USD 70 per metric ton midcycle.
- Group capital expenditure falls toward AUD 500 million sustainment-only levels by fiscal 2027 and no dilutionary equity raising is required
Mineral Resources’ shares are undervalued based on international peer multiples and relative to historical multiples. The valuation gap has already closed considerably and should continue to do so as Onslow’s costs fall and lithium prices recover.
The lithium price is unmaintainably low and set to recover
We think the lithium price is likely to rise as demand growth outstrips supply, leading the market back to balance by 2026.
We forecast the lithium carbonate price to more than double by fiscal 2028. This should add about AUD 365 million, or AUD 1.85 per share, to free cash flows.
Demand for lithium should rise rapidly for use in EVs and in energy storage systems to smooth supply and reduce costs from renewables. Meanwhile, supply growth is slowing given low prices. We expect lithium demand growth outpacing supply will boost prices by 2027.
The full stock pitch is available to Morningstar Investor subscribers and trialists.
You can find previous editions of Chart of the Week here.
