Onslow Iron's Ramp-Up And Cost Reductions Will Improve Operational Efficiency

Key Takeaways

• Solid liquidity position and cash flow from Onslow Iron support future growth and potential for debt reduction, enhancing net margins and earnings.
  
• Cost reduction in lithium operations and new client contracts indicate improved net margins and potential long-term revenue stability.
  
• High net debt, operational disruptions, and cost concerns could impact financial flexibility, profitability, and reliance on lithium market recovery.

Catalysts

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

• Mineral Resources has a solid liquidity position with $1.5 billion in cash, including an undrawn $800 million revolving credit facility, which provides financial flexibility for future growth opportunities and potential debt reduction, positively impacting net margins and earnings.
  
• The Onslow Iron mining operations are generating positive cash flow, with the carry loan repayments starting. As Onslow continues to ramp up production, this is expected to contribute significantly to future revenue and improve cash flow.
  
• Cost reduction measures in lithium operations, resulting in a lower workforce and equipment footprint, are expected to bring down expenses and improve net margins and earnings in the second half of the fiscal year.
  
• New and renewed external client contracts in Mining Services, especially with Onslow's ramp-up, indicate potential for increased revenue streams and long-term stability in earnings.
  
• The company has highlighted its potential to monetize assets or generate cash through strategic sales, such as the $800 million proceeds from the Hancock gas sale, which could enhance cash flow and investment capacity, positively influencing future net margins and earnings.

Mineral Resources Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mineral Resources's revenue will grow by 2.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.4% today to 8.5% in 3 years time.
• Analysts expect earnings to reach A$484.6 million (and earnings per share of A$2.54) by about February 2028, up from A$125.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$764 million in earnings, and the most bearish expecting A$155.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.5x on those 2028 earnings, down from 54.6x today. This future PE is greater than the current PE for the AU Metals and Mining industry at 13.4x.
• Analysts expect the number of shares outstanding to decline by 0.74% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.61%, as per the Simply Wall St company report.

Mineral Resources Future Earnings Per Share Growth

Risks

• High net debt levels at $5.1 billion, driven by significant CapEx and a working capital impact, may impact future financial flexibility and increase vulnerability to interest rate hikes, affecting net margins and earnings.
  
• The effects of severe weather events such as Cyclone Sean can disrupt operations and infrastructure, potentially impacting production rates and revenues.
  
• Persistent higher-than-guided operational costs, particularly in lithium and iron ore regions, could lead to reduced profitability unless cost-cutting measures are effective, impacting net margins.
  
• Safety concerns, highlighted by multiple truck rollovers and increased TRIFR, could result in higher operational costs or regulatory fines, potentially reducing net margins and earnings.
  
• A significant reliance on the lithium market rebounding, with any delay or failure to materialize this could affect expected cash flow improvements, putting pressure on revenues and net margins.

Valuation

• The analysts have a consensus price target of A$42.89 for Mineral Resources based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$70.0, and the most bearish reporting a price target of just A$22.8.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$5.7 billion, earnings will come to A$484.6 million, and it would be trading on a PE ratio of 21.5x, assuming you use a discount rate of 8.6%.
  
• Given the current share price of A$34.98, the analyst's price target of A$42.89 is 18.4% 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.