Mineral Resources Limited

Undervalued at the Current Juncture: Perth based, Mineral Resources Limited (ASX: MIN) has an engagement in providing an integrated supply of goods and services to the resources sector, with main focus on the iron ore and hard-rock lithium sectors. The company recently announced a change in its director’s interest where Timothy Roberts acquired 1,269,480 shares at a value consideration of $18,893,487.44 taking the final holdings to 3,276,864 shares.

In the Macquarie Australia Conference 2019, the Company highlighted its operational and financial updates. Its earnings per share (EPS) has been growing at 20% per annum since its IPO from FY07 to FY18. Its cumulative pre-tax profits from FY07 to FY18 has been reported more than $2 Bn. The growth rate of its total shareholder return (pre-tax) from FY07 to FY18 has been reported at 29% p.a.

YTD March 2019 Commodities Performance: Under Lithium segment, at Mt Marion, 297 kwmt of spodumene concentrate was delivered with an average price of A$1,328.13 / wmt for 6% and A$791.78 / wmt for 4%. At Wodgina, no production was reported. Under Iron Ore segment, at Koolyanobbing, 1.8m wmt of ore were shipped at an average price of A$95.89 / wmt. At Iron Valley, 5.5mwmt ore was shipped at an average price of A$67.83 / wmt.


Different Project’s Key Statistics (Source: Company Reports)

What to expect: The company intends to increase Koolyanobbing run-rate from 6 mtpa to 8 mtpa. It is working on progress approvals for Kumina project.It is also working on establishing JV operations with Albemarle. Its FY19 EBITDA at a consolidated group level is expected to be in the range of $360 million to $390 million.This is predicated on various assumptions including the pricing for lithium (spodumene concentrate) and iron ore. Major assumptions include:
 

• Spodumene concentrate price: US$682.38 per tonne (6%)
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• CFR 62% Fe: US$83.89 per tonne
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• AUD/USD: 0.723 cents
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Stock Recommendation: Its gross margin for H1FY19 stood at 95.9% which is better than the industry median of 41.6%, implying that the company is in a better position to address its operating expenses. On the valuation front, its P/E, P/BV and EV/Sales multiple for TTM stands at 23.990x, 2.40x and 2.73x which are lower than the peer median of 26.37x, 3.04x, and 3.44x, respectively indicating an undervalued position at the current juncture. Hence, considering the aforesaid facts and current trading level, we recommend a “Buy” rating on the stock at the current market price of $15.530 per share (down 0.703% on May 21, 2019). As per the Australian Securities and Investments Commission (ASIC) report, the short position for MIN’s share was reported at ~4.16% as on May 15, 2019.
 

Saracen Mineral Holdings Limited

Increasing Au grades and declining ASIC sets positive outlook: Saracen Mineral Holdings Limited (ASX: SAR) has an engagement in Gold mining, processing & sales, and mineral exploration. The company recently announced that Vinva Investment Management ceased to be a substantial holder of the company effective from May 16, 2019.

In another update, SAR announced an appointment of John Richards to the Board as an independent Non-Executive Director effective from May 1, 2019.Given his more than 35 years’ experience in the resources industry, Mr. Richards appointment further strengthens the commercial and corporate development of the company.

In its corporate presentation for May 2019, SAR highlighted that it has improved on the parameters of safety (Lost Time Injury Frequency Rate (LTIFR) reduced from 2 in Mar’18 to 0.7 in Mar’19). Around 400K oz per annum is underway from two simple growing Australian operations - Carosue Dam and Thunderbox. Its cash, bullion and investments in Mar’19 stands at $153 Mn with no debt. It reported a profit for H1FY19 at $43 Mn, and unaudited $26-29 Mn in March quarter. At Thunderbox, gold grade is increasing, and cost is decreasing (ASIC A$972/oz in the March quarter) as the C Zone open pit progresses.


Production Estimates (Source: Company Reports)

What To Expect: SAR’s FY19 group production guidance has been estimated at 345-365koz at AISC of A$1,050 - 1,100/oz. As its reserves are growing, with a 40% increase in FY17 to 2.1Moz; 20% increase in FY18 to 2.5Moz (record); 4Moz Reserve target is expected within 5 years.

Stock Recommendation: Its EBITDA margin and net margin for H1FY19 stands at 37.1% and 15.2% which are better than the industry median of 34.6% and 13.0%, respectively, showing decent fundamentals of the company than its peer group. Its ROE for H1FY19 stands at 10.6% better than the industry median of 6.5%, which implies that the company generates a better return for its equity-holders than its peer group.

Its current ratio for H1FY19 stands at 2.64x better than the industry median of 1.87x, displaying a better liquidity position to address its short-term obligations than its peer group.

Its share is trading close to its 52 weeks high levels, and it has upgraded its FY19 production guidance which has tuned investor’s sentiment positive, leading to the possibility of breakout at the present levels. Hence, considering the aforesaid facts and current trading level, we maintain our “Hold” rating on the stock at the current market price of $3.270 per share (up 0.615% on May 21, 2019). As per the Australian Securities and Investments Commission (ASIC) report, the stock experienced a short interest of ~4.18% as on May 15, 2019. 

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