No earnings from its iron ore business has meant no interim dividend for shareholders in Mineral Resources for the six months to December.
The Perth-based miner and services company was always expected to be hit hard by 2021’s slide in iron ore prices and that’s exactly what happened with the company on Wednesday reporting an 80% collapse in earnings before interest, tax, depreciation and amortisation and a bottom-line loss for the December half year.
The slide was matched by a slide in the share price which fell nearly 9% to $52.72. Not even news of a return to a deeper involvement in the lithium sector could help the shares yesterday.
MinRes revealed underlying earnings before interest, tax, depreciation, amortisation and impairment (Underlying EBITDA) of $156 million, down 80% from the $763 million reported on the same basis for the December, 2020 half year.
Directors said that “Earnings were negatively impacted by the collapse in iron ore prices and widening discounts,” which refers to the lower price MinRes has been forced to accept compared to the index price for 62% Fe fines. In 2020 the discounts were small, but widened after prices slumped from May 2021 onwards.
Iron ore volumes rose 25% in the half, but revenue fell 28% due to the steep fall in iron ore prices (from around $US237 a tonne in May of last year to just over $US87 a tonne in November. Prices for 62% Fe fines are now back above $US140 a tonne) and those wider discounts for MinRes’ lower grade ores (compared to the 62% Fe index price).
As a result, MinRes’ two iron ore hubs produced an EBITDA loss of $104 million, down from a profit of $686 million in the back half of 2020.
That helped explain the underlying net loss after tax of $36 million, down 108%.
Directors said that in light of its capital investment program, the underlying net loss after tax for the half and volatile conditions in the iron ore market, the Board has decided to not declare an interim dividend.
“The Company remains on target to meet FY22 volume guidance of a 15-20% increase for Mining Services, spodumene export guidance of 450,000-475,000 and the revised full-year iron ore export guidance of 18.5-19.5 mtpa,” MinRes said in the statement.
Mining services was the bright spot with earnings before interest, tax, depreciation and amortisation (EBITDA) increasing from $46 million to $281 million as the company mined more iron ore and spodumene.
The Mt Marion lithium project operated and half-owned by Mineral Resources tripled its revenue in line with a similar move in the price of lithium product spodumene.
Mt Marion produced an EBITDA of $67 million.
However, costs increased 60% on flat volumes due to substantially higher shipping and haulage costs, higher royalties and a reduced yield after low-grade ore was processed due to workforce constraints and the opening of a new area to be mined.
That helps explain MinRes’s comments that while Australian spodumene export prices have almost quintupled over the past year, production costs have also exploded thanks to the impact of Covid and the WA government’s hard line border policies which have limited the flow of labour. Higher haulage fuel costs haven’t helped as well for all the company’s businesses.
CEO Chris Ellison said in Wednesday’s release that “it has been a challenging half, as we continued to navigate the uncertainty of a COVID-19 world and maintained our focus on protecting the jobs of all our people. I am proud of the efforts of the more than 4,800 men and women in our business for their united and disciplined approach, which so far has enabled us to keep COVID-19 out of our operations.
“It hasn’t been easy and the challenges during 1H22 were amplified by the collapse in iron ore prices. This has delivered our worst first half financial result in three years.
“These results do not reflect the substantial progress in our iron ore, lithium and gas businesses during the last six months which will create significant value for decades to come and which underpins our long-term growth for our Mining Services division.
“Mineral Resources has a proud and unrivalled history of outperformance and delivering exceptional value for all stakeholders since we listed on the ASX in 2006.
“This history includes prudent and well-timed investments and, at all times, a disciplined financial approach without taking our focus away from our long-term goals that we set for this business.
“The Board’s decision to not declare an interim dividend aligns with the Company’s long-term approach to building sustainable success,” He explained.
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Doubtful it’s a coincidence, given the above, that MinRes has finally decided that it wants to be bigger in lithium, both in Australia and outside, after years of hedging its bets.
Its partner would be its existing ‘friend’, the giant Albemarle group of the US which already has extensive interests in the Lithium business with MinRes and other WA companies (the Greenbushes mine for example).
Up to the lithium bust in 2017 and 2018 MinRes seems to have decided to become a major player in the metal, but the years of sliding prices and oversupply saw it try to limit its exposure by getting deeper into deals with Albemarle – both in mining and the associated Kemerton processing plant.
Now, with iron ore on the slide and demand for lithium (and other metals such as copper and cobalt) looking a lot better, MinRes has seemingly rediscovered its ambitions to be a major player.
The decision to look at an expansion of its current interests into a larger involvement came the same day as the company revealed a trading loss for the six months of December because of the collapse in iron ore prices and higher costs.
MinRes told the ASX that it had signed a non-binding letter agreement with Albemarle Corporation to explore a potential expansion of the two companies’ MARBL Lithium Joint Venture (or MARBL).
If agreed to, the non-binding agreement envisions could see some or all of the following
Ownership of the Wodgina spodumene (lithium) mine in the Pilbara mine would change from 60% Albemarle, 40% Min Res, to a 50/50 venture.
Min Res would resume management of the Wodgina mine but ownership of the Kemerton plant’s first and second phases would remain 60/40 (in favour of the US company).
Kemerton would be fed by lithium ores from the Greenbushes mine in the southwest of WA.
As well, there will be a new 50/50 Joint Venture to own additional lithium conversion assets outside of Australia to be jointly funded by MRL and Albemarle. Albemarle would be the operator of these assets.
Albemarle will remain the exclusive marketer of lithium products produced by both Joint Ventures.
“The principles and transactions contemplated by the Agreement, including asset valuations and operating horizons, are subject to due diligence and the parties entering into binding agreements to affect the proposed transactions, which is expected within the next three months, MinRes explained in Wednesday’s statement.
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A separate announcement on Wednesday from the company feeds into the bigger statement of the new direction.
MinRes said it had “taken possession and control of its 51% share of the Mt Marion spodumene offtake, from February 1, 2022.”
“The Company has entered into a toll treatment agreement for its share of Mt Marion spodumene to be converted into lithium hydroxide by Ganfeng Lithium Co (Ganfeng) in China. The term of the agreement is seven months, with an option to extend.”
“MRL anticipates first lithium hydroxide sales in May 2022. Earnings are not expected to be material for the current financial year.”
MinRes said it has also told Ganfeng that it is undertaking studies with a view to growing spodumene production at Mt Marion through process optimisation and contact ore treatment. Each of these studies is targeting an increase in annual spodumene production of 10% to 15%.”
