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Mineral Resources shares shoot up by 8% after strong full-year results

Mineral Resources shares could be starting to rebound after delivering strong FY23 earnings, though free cash flow remains a concern.

mineral resources Source: Bloomberg

Mineral Resources (ASX: MIN) shares rose by 8% to $69.48 yesterday after encouraging full-year results. Interestingly, Pilbara Minerals — which had reported its own results just days earlier — dropped by 8% on results day, after missing perhaps overexuberant analyst expectations.

However, while MIN delivered several encouraging numbers, the ASX mining stock is still down by 7.5% year-to-date, compared to the S&P ASX 200 Resources index which has risen slightly by circa 1%. With positive sentiment now perhaps on its side, Mineral Resources shares could go higher through Q1 and beyond.

But remember, past performance is not an indicator of future returns.

Mineral Resources shares: full-year results

In promising FY23 results, MIN saw revenue surge by 20% year-over-year to $4.8 billion, sending EBITDA up by 71% to $1.8 billion. However, net profit after tax fell by 30% to $244 million, mostly due to $552 million of non-cash impairment charges of the Yilgarn and Utah Point iron ore assets as the company transitions to a more sustainable iron ore business.

Meanwhile, cash fell by 43% to $1.4 billion, while net debt rose by 166% to $1.9 million. On the asset front, net assets rose by 8% to $3.5 billion, though return on invested capital was just 6.7%, less than half the 14.1% of last year.

But importantly, the ASX 200 lithium company delivered a fully franked dividend of $0.70 per share, yielding an overall FY23 dividend of $1.90 per share, a 90% increase on FY22.

In its key lithium segment, MIN delivered a record underlying EBITDA of $1.3 billion, driven by strong pricing and increased volumes. At Wodgina, the ramp up appears to be going well with two trains operational, all three trains commissioned, and its ownership interest in MARBL JV partnership with titan Albemarle increased by 50%.

The company also completed construction of its Mt Marion plant expansion and executed a ‘major exploration program which revealed strong underground potential,’ including for open pit extensions and underground mining.

In its iron ore segment, the company made its Final Investment Decision to develop the flagship Onslow Project, with key approvals made and construction ‘well progressed.’ And in energy, it drilled two onshore natural gas discoveries in the Perth Basin, while also completing its takeover of Norwest.

Mining Services saw the company awarded six new contracts, and it also renewed four contracts with Tier 1 clients over the financial year.

Managing Director Chris Ellison enthuses that ‘MinRes continued to execute our high-growth strategy…growth was driven by record lithium earnings, but we also faced operational challenges in the second half and were not immune from global inflationary pressures that impacted all businesses.’

Analyst commentary

Prior to the results, Goldman Sachs was forecasting revenue of (circa) $4.78 billion and EBITDA of $1.9 billion, while Bell Potter expected to see revenue at $4.52 billion and EBITDA at $1.72 billion. Goldman was correct on the revenue front, though EBITDA came in at the middle of the two estimates.

While Goldman forecasted better results than Bell Potter, the investment bank’s analysts remain bearish on the stock with a sell rating and $56 price target due to free cash flow concerns. The bank was also not impressed when MIN pulled the plug on a potential $1 billion lithium hydroxide plant deal in China owned by partner Albemarle earlier this year.

Meanwhile Bell Potter has a buy rating with a $90 price target, arguing that ‘MIN’s business is undergoing considerable growth (with more certain to follow).’

This divergence of opinion is to be expected given the complexity of valuing MIN’s varied operations across the lithium, iron ore, and energy sectors — with all three experiencing price volatility.

Where next for Minerals Resources shares?

Ellison notes that despite the impairment charges, the company is ‘investing in exploration to maximise the value potential from the Yilgarn, while options for Utah Point are being considered as part of the South West Creek development.’

He also noted that the ‘flagship Onslow Iron project made enormous progress. All major approvals have been received, construction is on track and the project will start generating cash in 12 months.’

On the other hand, the MD also warned that while it now has ‘enough gas to help the Western Australian domestic market stay in long-term surplus, and to export to the world as LNG, the significant capital investment required to maximise this potential is being held back by the current WA domestic gas policy.’

MIN shares could continue to be an excellent growth opportunity, though as Goldman Sachs has warned, there may be some cash flow teething issues.

But with revenue rising, Ellison enthuses that Mineral Resources is ‘well-placed for another year of transformational growth across all parts of our business that will continue to drive value for our shareholders.’

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