Electrification And Urbanization Will Fuel Battery And Iron Ore Demand

Key Takeaways

• Operational improvements in iron and lithium operations could drive margins higher and position Mineral Resources as a structurally lower-cost producer than peers.
  
• Expanding sustainable practices and automation may boost premium sales, attract ESG investors, and deliver resilient, above-cycle service revenue.
  
• Exposure to volatile commodity prices, high capital needs, regulatory risks, structural demand shifts, and increasing competition threaten Mineral Resources' long-term profitability and market position.

Catalysts

Together with subsidiaries, operates as a mining services company in Australia, Asia, and internationally.

• While analysts broadly agree that Onslow Iron's ramp-up will drive EBITDA growth and reduce leverage, the company's own disclosure implies production capacity could surpass consensus, reaching above 35 million tonnes per year as haulage and shipping optimizations come online, which could deliver both unexpected revenue upside and steeper net margin expansion as costs drop into the low $40s per tonne.
  
• Analyst consensus expects improved lithium volumes and reduced costs to support margins, but recent operational commentary and mine plans suggest further cost reductions and grade improvements at Wodgina may drive sustained outperformance, positioning Mineral Resources as a structurally lower-cost producer-lifting long-term group earnings and margins above expectations.
  
• The accelerating global demand for clean energy and battery materials puts Mineral Resources, with its integrated and expanding lithium operations, in prime position to deliver both volume and price-led earnings growth as structural supply deficits drive higher realized prices and asset values.
  
• Mineral Resources' significant investment in sustainable mining practices and new supply chain enhancements is set to attract ESG-focused customers and investors, creating potential for sales premiums and new market access, directly benefitting revenue and profit margins as decarbonization pressures intensify worldwide.
  
• The scale and diversity of Mineral Resources' mining services division, coupled with automation and digitalization initiatives, is likely to materially increase recurring high-margin service revenue, smoothing group cash flows and driving above-cycle net margin resilience over the coming years.

Mineral Resources Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Mineral Resources compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Mineral Resources's revenue will grow by 21.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -24.4% today to 22.9% in 3 years time.
• The bullish analysts expect earnings to reach A$2.1 billion (and earnings per share of A$10.57) by about July 2028, up from A$-1.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 5.9x on those 2028 earnings, up from -4.9x today. This future PE is lower than the current PE for the AU Metals and Mining industry at 13.1x.
• Analysts expect the number of shares outstanding to grow by 0.5% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.81%, as per the Simply Wall St company report.

Mineral Resources Future Earnings Per Share Growth

Risks

• Overdependence on volatile prices for key commodities like lithium and iron ore exposes Mineral Resources' revenues and earnings to cyclical downturns, as management acknowledges sensitivity to sustained price drops below current floors, impacting future cash flow stability.
  
• Heavy capital expenditure requirements, highlighted by a net debt position of $5.4 billion and the need for ongoing investment in large projects such as Onslow Iron, risk pressuring future net margins and constraining returns on invested capital, especially if market conditions deteriorate or ramp-ups underperform.
  
• Increased regulatory and social scrutiny around environmental, social, and governance issues-reflected by ongoing Board governance concerns and active legal disputes over new port charges-may lead to higher compliance and legal costs, potentially eroding profitability.
  
• Growing global trends in metal recycling and battery reuse could materially reduce demand for newly mined lithium and iron ore, undermining Mineral Resources' long-term volumes and pricing power and thereby putting downward pressure on long-term revenues.
  
• Rising competition from state-backed and lower-cost producers in emerging economies, coupled with long-term industry digitization and automation, could structurally constrain commodity prices and compress sector-wide profit margins, diminishing Mineral Resources' global competitiveness and affecting its earnings over time.

Valuation

• The assumed bullish price target for Mineral Resources is A$48.31, which represents two standard deviations above the consensus price target of A$27.1. This valuation is based on what can be assumed as the expectations of Mineral Resources's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$58.0, and the most bearish reporting a price target of just A$14.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be A$9.1 billion, earnings will come to A$2.1 billion, and it would be trading on a PE ratio of 5.9x, assuming you use a discount rate of 8.8%.
• Given the current share price of A$30.66, the bullish analyst price target of A$48.31 is 36.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.