Chris Ellison’s Mineral Resources has its first ore on ship at the 35Mtpa Onslow Hub
The project brings iron ore back to the fore for the ASX 50 miner, which has been treated by the market like a pure play lithium stock
Goldman Sachs tips thermal coal oversupply, New Hope crash despite strong April quarter for NSW coal miner
Could Chris Ellison’s Mineral Resources (ASX:MIN) become a fourth (or fifth) force in Australian iron ore?
While the nation’s eyes have been turned to a losing battle waged by Gina Rinehart and a gaggle of Aussie swimmers against the National Gallery over a though-provoking, bear-poking Vincent Namatjira portrait, Ellison has quietly wrapped a bow around his first shipment from the 35Mtpa Onslow Iron project.
MinRes is planning to hit that rate by the middle of next year and eventually ramp up to 50Mtpa, producing low grade dirt at a cost low enough to help it ride out the cycles.
The lithium, iron ore and mineral services provider – also branching out into a swag of interconnected businesses including gas supply and, somehow, its own airline – is the operator of the project, which is located some 150km east of Onslow in the West Pilbara.
Once its first shipment is received in China, MIN’s ownership level will rise to 60.3% — the other parties being China’s Baowu, America’s AMCI and Korea’s POSCO. But MinRes has ensured that its gets an additional cut of meat via a life of mine mining services contract and road infrastructure charge of $8.04/t.
Part of that will be ceded to a third party via a sell down process of 49% of the track to raise cash and help balance the books.
Two MinRes transhippers have taken 113,000wmt of ore 40km out to sea from the Port of Ashburton to load the maiden shipment, crystallising plans Ellison and his team have been crafting for as long as a decade to bring a ‘fully integrated mine-to-ship’ mining and infrastructure development to fruition.
Why Onslow?
Until now MinRes has produced the world’s most traded metal from a Pilbara hub exporting through the Utah Point facility in Port Hedland, and its Yilgarn hub, anchored by the long-running Koolyanobbing mine near Southern Cross.
They’re decent earners, generating solid cashflows at current price levels and discount rates. As evidenced by Baowu’s decision to take the maximum 75% share of MinRes’ offtake it’s entitled to from Onslow for 2024, low grade iron ore is currently in demand as China’s steelmakers struggle with margins.
But MinRes’ existing mines were marginal as recently as late 2021, when MinRes delivered a surprise H1 FY22 loss on sliding iron ore prices.
Koolyanobbing in particular is fragile. At $107/wmt YTD (guidance $97-107/wmt), a big drop in price or lower grade price realisation could scuttle the Yilgarn hub (though MinRes has received significant WA Government support to keep shipping through the Port of Esperance).
Utah Point has delivered better FOB costs so far this year of $73/wmt.
Onslow should blow those out of the water. At $45/wmt, the $3 billion development is closer in nature to the massive mine, rail and port networks operated by BHP (ASX:BHP), Rio Tinto (ASX:RIO), Fortescue (ASX:FMG) and Roy Hill, the first three all operating at around US$20/t.
MinRes believes it will generate a 20% return on invested capital even if iron ore prices were to fall to US$75/t.
There is an added bonus for shareholders in Josh Pitt’s Red Hill Minerals (ASX:RHI).
It received $200 million in cash when it sold its stake in the Red Hill Iron Ore JV, now part of Onslow Iron, to MinRes in 2021.
With the first ship delivering to China, RHI will be due a second instalment of $200m and a 0.75% ongoing royalty.
Red Hill shares are up more than 40% over the past year. $420 million capped RHI paid out $1.20 a share to investors in late 2021, drip feeding 10cps and 20cps payouts every six months since.
Back to MinRes, it has been priced as a lithium stock for a few years, but the delivery of Onslow could turn investors’ minds back to iron ore if it can ramp up on schedule.
Goldman bearish on thermal coal
It was a solid April quarter report from New Hope Corp (ASX:NHC), one of a handful of large pure play thermal coal miners out there after its nearest peer Whitehaven Coal (ASX:WHC) took the plunge and bought the BHP (ASX:BHP) owned Daunia and Blackwater mines in Queensland.
While WHC is eyeing a revenue mix of 70% met coal or higher, New Hope continues to focus on energy markets, anchored by its large and low cost Bengalla mine in the Hunter Valley.
Its third quarter performance was nothing to sneeze at, lifting production and sales by 21% QoQ to 2.5Mt and 2.4Mt respectively.
Run of mine production at Bengalla came in well above nameplate at 14.8Mtpa, with March regarded as the company’s sixth best month of sales in a history stretching back 25 years.
That saw its unit costs fall to $73/t, leaving it well placed to hit the lower end of a $72-81/t range, with Goldman Sachs analysts cutting their cost forecasts from $77/t to $75/t for the year.
While thermal coal pricing came in at an 11% discount to the Newcastle index, at $180/t margins were solid, with $219m in EBITDA flying through the doors.
At the same time, Goldman continue to be sell rated on New Hope, even as the miner looks to boost production by 90% over the next half-decade at a time when miners are struggling to approve new operations and extend old ones.
“The stock is trading at ~1.35x NAV (A$3.67/sh) and discounting a long-run thermal coal price of ~US$100/t (real) vs. our US$83/t estimate (based on our view of long run global marginal costs),” analysts Paul Young and Caleb Heiner said.
“NHC is also trading on a NTM EBITDA multiple of ~5x vs. global coal peers on ~4.5x (median). We note that FCF yield is -3%/10% in FY24/25 on our ~US$132/113/t thermal coal price assumptions, and -2%/17% at spot thermal (both include benefits from hedging).”
At the same time, higher long run production assumptions for Bengalla saw Goldman lift its 12-month price target for NHC to $3.60, up from $3.50 — still a major discount to its current value of $5.04.
Young and Heiner noted the investment bank’s global commodity team was bearish on the thermal coal market balance.
“Our global commodity team forecasts a ~40Mt surplus for 2024 due to decreasing global import demand, largely driven by a weakening in China hoarding demand (-80Mt) and high inventory levels, and growing export capacity (+50Mt) from Indonesia, Australia and Russia, and we expect marginal costs to fall to US$100/t in 2024. We forecast US$130/t for 6000kcal NEWC benchmark in 2024,” they said.
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