Australian investors face a paradox in the commodities space. Prices for most of Australia’s mining commodities remain strong, and the outlook for most is also good as the world’s metal needs continue to expand – particularly in the metals crucial to the expected transition to cleaner energy sources – but the traditional go-to stocks appear to be either fully valued, or over-valued.
With BHP and Fortescue Metals well and truly in the latter space, on analysts’ consensus price targets – and Rio Tinto trading virtually at the consensus target — the Australian market’s most popular mining stocks do not appear to offer much joy.
But investors who do not want to go to the more speculative explorer-type exposures can stay in the Top 50, if they look at some of the S&P/ASX 50’s other miners.
Here are four other big miners that appear to be offering good total-return value right now – with the essential resources caveat added, that commodity prices and exchange rates can be highly volatile, and with them, miners’ earnings. But it’s the long-term commodity price trends that investors should focus on when considering the business prospects of these companies.
- Mineral Resources (MIN, $80.59)
Market capitalisation: $15.3 billion
12-month total return: 57.6%
Three-year total return: 86.3% a year
FY24 expected dividend yield: 7% fully franked (10% grossed-up)
Analysts’ consensus price target: $94 (Stock Doctor/Thomson Reuters, 14 analysts), $100 (FN Arena, seven analysts)
Perth-based Mineral Resources mines iron ore and lithium in Western Australia. It has three iron ore production hubs in Western Australia’s major iron ore provinces: the Yilgarn, Pilbara, and Ashburton. Since production commenced in 2010, the company has grown to become the fifth-largest iron ore producer in Australia.
In lithium, the company has stakes in two of the world’s largest hard-rock lithium mines – Marion in the Goldfields region of WA and Wodgina in the Pilbara region – and has strategic partnerships with global leaders in producing battery-grade lithium hydroxide.
MinRes is developing two high-quality projects – Onslow Iron, in its Ashburton Hub, and South West Creek, in the Pilbara Hub – and between them, the two expansion projects will potentially quadruple iron ore production in the next five years.
First ore from the priority expansion project, the $3 billion Onslow Iron, is expected around June 2024. Mine life is expected to be more than 30 years, with target export levels of up to 35 million tonnes a year, with up to 75% of production going to cornerstone partner, Chinese steel company Baowu. The company has posted cost guidance at Onslow of $40 a tonne, free-on-board excluding royalties.
In lithium, all of MinRes’ spodumene (lithium ore) production is converted to lithium battery chemicals. Mt Marion is a 50/50 joint venture with Chinese lithium giant Ganfeng, with MinRes being the operator of the mine. At the moment, the partners are doubling production capacity to 900,000 tonnes a year. Wodgina is a 50/50 joint venture with US specialty chemicals company Albemarle: MinRes is also the operator of this mining operation.
In lithium hydroxide, MinRes is involved in a 40:60 joint venture with Albemarle in the Kemerton lithium hydroxide processing facility in Western Australia, which achieved first production in mid-2022 and is moving through commissioning for Trains 1 and 2 of the operation, as it looks to achieve a nameplate production capacity of 50,000 tonnes per annum (tpa) of lithium hydroxide. Albemarle is set to make a final investment decision (FID) on Kemerton’s Trains 3 and 4 this year, with Kemerton planned to expand to 100,000 tpa.
In February, MinRes invested $US660 million ($969 million) in a deal with Albemarle in which the US company will increase its share in the first two trains of the Kemerton lithium hydroxide plant from 60% to 85%, with MinRes’ stake reducing to 15%. The deal also involved MinRes acquiring a 50% interest in Albemarle’s wholly-owned Qinzhou and Meishan lithium conversion plants in China.
With a production capacity of 25,000 tpa of lithium carbonate equivalent (LCE) product, Qinzhou currently produces both lithium carbonate and lithium hydroxide. The plant is expected to commence conversion of Wodgina spodumene concentrate in early 2024. The Meishan plant is under construction and is expected to support the production of 50,000 tpa of lithium hydroxide, with commissioning set to commence by the end of 2024. MinRes says it expects to double its lithium hydroxide capacity over the next five years, from 60,000 tonnes a year to 120,000 tonnes.
MinRes also provides pit-to-port mining services through its CSI Mining Services and Process Minerals International businesses, which offer contract services ranging from mine design, mining, to crushing, materials handling, and processing. MinRes is the world’s largest crushing contractor.
MinRes has been a very successful investment since it listed on the Australian Securities Exchange (ASX) in 2006 with a market capitalisation of $100 million market cap. 17 years later, with 35% compound annual growth in total shareholder returns, the company has a market value of $15.3 billion. Revenue has grown by 36% compound annual growth for the last five years, to reach $4.4 billion.
Analysts have MinRes priced on a price/earnings (P/E) ratio of 10.8 times expected FY23 earnings, but just 5.1 times expected FY24 earnings – on the latter figure, that is a stock in the bargain basement. (For context, the industry average P/E is 10.3 times expected FY23 earnings, and 8.7 times expected FY23 earnings.) With analysts expecting healthy share price growth, and a juicy fully franked dividend yield also on the table, MinRes looks an attractive buy.
- South32 (S32, $4.37)
Market capitalisation: $19.9 billion
12-month total return: —5.9%
Three-year total return: 451.7% a year
FY24 expected dividend yield: 5.5% fully franked (7.8% grossed-up)
Analysts’ consensus price target: $4.99 (Stock Doctor/Thomson Reuters, 18 analysts), $5.12 (FN Arena, six analysts)
I looked at South32 several weeks ago ( https://switzerreport.com.au/is-south32-a-buy/ [1]) and I said it was a buy: the stock has moved higher, and I am reiterating that call, on total-return grounds. The basis of the call is South32’s pivot to what it calls “future-facing” metals, especially copper, nickel, and zinc.
When South32 was spun-off from parent company BHP into its own separately listed entity in May 2015, it started out with a business well-diversified both geographically and by commodity, with bauxite, alumina and aluminium operations in Australia, Brazil, South Africa, and Mozambique; manganese ore and alloy operations in Australia and South Africa; the Cannington zinc-lead-silver mine (one of the world’s biggest producers of silver and lead) in Australia; the Illawarra metallurgical (steelmaking) coal operations also in Australia; thermal (electricity) coal in South Africa; the Cerro Matoso nickel mine in Columbia; the Hermosa development project (zinc-lead-silver) in USA, and a globally spread exploration portfolio.
More recently, the company has pivoted more to base metals, and specifically, “towards he metals critical for a low-carbon future.” (In addition to its climate goals, this transition generally gives South32 greater exposure to higher-margin businesses.) In February 2022, South32 brought copper into its portfolio by buying-out the Sumitomo companies’ 45% share in the Sierra Gorda open-pit copper and molybdenum mine in Chile, a long-life deposit at which production commenced in July 2015. Last financial year, the company lifted its shareholdings in Mozal Aluminium and the Mineração Rio do Norte (MRN) bauxite mine and decided to participate in the restart of the Alumar aluminium smelter in Brazil, which it also billed as significant steps down the low-carbon future route. South32 exited thermal coal in 2021; but retains its high-quality steelmaking coal operations in Australia.
Aluminium is also important to the company: the aluminium price and the alumina [aluminium oxide] price are the two biggest influences on South32’s earnings). Higher forecast prices for aluminium, alumina and copper prices make much of the case for buying S32 at present (although weak steelmaking coal prices are expected to offset these gains to some extent).
For the half-year to December 2022, South32 reported underlying earnings before interest, tax and depreciation (EBITDA) of $US1.36 billion ($1.97 billion) and declared it one of the company’s “best profits results” in the face of inflation pressures and commodity prices coming off record highs. Production rose 12% across its global operations, but net profit, at $US685 million ($992.3 million), down from $US1.03 billion at the December 2021 half-year, reflecting weaker prices for aluminium, alumina, zinc and manganese.
Analysts expect falling earnings per share (EPS) in FY23 (but rising again in FY24). However, the consensus profit expectations have S32 priced at 8.9 times expected FY23 earnings, and 8.5 times expected FY24 earnings.
On the dividend front, from 32.65 Australian cents in FY22, South32’s dividend is expected to come in at about 19.4 Australian cents in FY23, and increase to 23.9 cents in FY24, on a payout ratio of 46.4%. On that basis, a grossed-up projected yield of 7.8% potentially augments a reasonable capital-growth expectation.
- Pilbara Minerals (PLS, $3.94)
Market capitalisation: $11.8 billion
12-month total return: 26.4%
Three-year total return: 194.5% a year
FY24 expected dividend yield: 4.6% fully franked (6.6% grossed-up)
Analysts’ consensus price target: $4.90 (Stock Doctor/Thomson Reuters, 14 analysts), $5.57 (FN Arena, four analysts)
Unlike the other stocks in this group, Pilbara Minerals is a single-commodity exposure, operating solely in hard-rock spodumene (lithium ore) mining in Western Australia.
PLS has one of the best lithium mining operations in the world, at Pilgangoora. The company is in the process of lifting the production capacity of the Pilgangoora project from 580,000 tonnes of spodumene concentrate a year to 680,000 tonnes, and last month, the Pilbara board pressed the green light on the P1000 project, which will increase the production capacity by a further 47%, to one million tonnes. The P1000 project is targeting first ore in the March quarter of 2025, with full production to be reached in the September quarter of 2025. At this new expanded production level, the mine-life is expected to run at more than 26 years.
In the December 2022 half-year, PLS shipped 286,876 dry metric tonnes (dmt), a rise of 69%. The company’s unit operating cost (FOB Port Hedland and excluding royalties) was $595 per dmt — and $1,136/dmt CIF (cost, insurance and freight) in China) once freight and royalty costs included — compared against an average realised selling price of US$4,993 ($7,447) per dmt, on a CIF China basis.
Sales revenue came in at $2.18 billion for the half-year, up seven-and-a-half times, with underlying profit after tax up 14.6 times, to $1.24 billion. Strong production volumes and pricing contributed to 3.8 times swelling of the company’s cash balance, to $2.23 billion. The burgeoning profit enabled PLS to reward its shareholders with an 11-cent fully franked interim dividend – its debut dividend. Analysts expect a .12-cent dividend for the current half-year to round-out a full-year dividend of up to 23 cents.
Pilbara is moving to extract more value along the battery metals supply chain. In conjunction with South Korean steel-making company POSCO, Pilbara is building a lithium hydroxide plant in South Korea that will convert about 315,000 tonnes a year of spodumene from Pilgangoora into 46,000 tonnes a year of high-value hydroxide once fully operational. Lithium hydroxide is a key ingredient in the lithium-ion batteries used in electric vehicles (EVs): the strategy is built around establishing a foothold in South Korea’s emerging battery materials industry, at the doorstep of established major battery manufacturers.
POSCO and Korean banks have helped fund the Korean plant, which is expected to commission the first 21,500-tonne-a-year train late in calendar 2023, with the second train following in the first half of 2024. Pilbara Minerals has an option to lift its equity stake in the hydroxide joint venture from 18% to 30% as it moves downstream in battery chemicals. PLS also has a deal with industrial process technology developer Calix to develop a demonstration plant at Pilgangoora to produce lithium salts, with further refining to create lithium fine chemicals.
Pilbara says the expected deficit in lithium by 2040 is the equivalent of about 18 Pilgangooras, with what it says are “likely pricing implications.” Lithium pricing has been volatile lately – with demand swings in China the major culprit – but the longer-term outlook, based on the switch to electric vehicles and renewable technology, is still considered very healthy. (An argument could be made that lithium price fluctuations would be nothing new to investors experienced with what happens in other commodities, for example, iron ore.)
PLS looks very cheap, trading on a P/E ratio of 4.5 times earnings, assuming it can hit the $2.5 billion forecast profit that analysts expect in FY23, and 5.5 times earnings based on the expected FY24 profit of $2.1 billion. Again, there is an attractive fully franked yield expected.
- IGO (IGO, $12.77)
Market capitalisation: $9.7 billion
12-month total return: —7.8%
Three-year total return: 47% a year
FY24 expected dividend yield: 3.5% fully franked (5% grossed-up)
Analysts’ consensus price target: $16.25 (Stock Doctor/Thomson Reuters, 16 analysts), $15.40 (FN Arena, six analysts)
Diversified miner IGO has a portfolio of high-quality assets, with exposure to nickel, copper, cobalt and lithium both upstream and downstream. IGO’s flagship asset is its wholly owned Nova nickel-copper-cobalt mine (360 kilometres southeast of Kalgoorlie, in Western Australia), and it also owns and operates the Forrestania Nickel operation and the Cosmos Nickel project, also in Western Australia.
In December 2020, IGO diversified into the lithium business, selling its stake in the Tropicana gold mine to fund the $1.9 billion purchase of a 25% stake in the world’s largest hard-rock lithium mine, the Greenbushes mine in WA, and a 49% stake in a lithium hydroxide plant at Kwinana, south of Perth. The company’s lithium business, Tianqi Lithium Energy Australia (TLEA), is a joint venture with Chinese mining and manufacturing company Tianqi Lithium Corporation, with IGO holding 49%.
The TLEA acquisition has been transformational for IGO, which now generates most of its profit from its lithium business.
The Kwinana refinery made its first commercial sale in December 2022 and commenced commercial production at Train 1 during the December quarter, producing 585 tonnes of battery-grade lithium hydroxide. Meanwhile, Greenbushes, the largest and highest-grade hard-rock lithium mine in the world, achieved a record 87% EBITDA margin in the December half.
For the December 2022 half-year, IGO’s profit surged 552%, to $591 million, with revenue up 43% to $541.7 million. That enabled a 14 cents per share interim dividend, a 40% lift on the 10-cent full-year dividend in FY22. Analysts have IGO priced at just 6.3 times expected FY23 earnings, and 9 times expected FY24 earnings. When it comes to dividends, the yield that analysts project is not as generous as the other three stocks, but it does handily supplement a capital-growth proposition that is viewed by the market as the best of the group.
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