Ground Breakers: Wow, falling iron ore prices last year really did a number on MinRes profits

Chris Ellison’s Mineral Resources (ASX:MIN) has revealed the battering it took from the unprecedented fall in iron ore prices through the first half of 2022, with underlying EBITDA falling a whopping 80% on the same period a year earlier to $156 million.

Having enjoyed a profit of $1.1 billion at the end of a 2020-21 financial year characterised by record iron ore prices, the tumble in its flagship commodity had a savage impact on its half-year results.

MinRes dumped its interim dividend as it delivered an underlying net loss after tax of $36 million and statutory NPAT of just $20 million, a 96% drop from the first half of 2021.

MinRes’ results show the challenges linked to its lower grade and higher cost iron ore operations during times of price volatility compared to majors BHP (ASX:BHP), Rio Tinto (ASX:RIO) and Fortescue Metals Group (ASX:FMG).

While they produce at around $20/t, MinRes’ Utah Point hub in the Pilbara was up at $96.3/t CFR, while its Yilgarn hub centred around the Koolyanobbing operations, where MinRes reduced production by around 3Mt in the face of falling prices, had costs of $104.2/t CFR.

Iron ore prices fell from US$237/t in May to just US$87/t by early November on slowing steel production in China, before a rebound in late 2021 and early 2022 drove them back to ~US$150/t in recent days.

Utah Point shipped 5.4Mt in the quarter, while MinRes waved off 4.4Mt of iron ore from Yilgarn hub through the Port of Esperance.

According to MinRes, iron ore prices accounted for a $631 million drop in EBITDA on the same period in 2021. Ultra high freight costs also had an impact, with shipping accounting for a negative EBITDA impact of $151 million.

MinRes’ long term strategy over the next 3-5 years will be to progress two large scale iron ore hubs at the 30Mt West Pilbara and 20Mt South West Creek that will turn it from a modest 20Mtpa producer into a genuine mid-tier miner with the economies of scale to compete with iron ore majors on costs.

But it is also increasingly focused on its investments in the booming lithium space. MinRes exported 207,000t of spodumene from its Mt Marion mine in the half.

“This 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,” Ellison said.

“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.”

Lithium expansion

The bad news about MinRes’ iron ore interests was tempered by a number of significant developments in its lithium business.

Most importantly, MinRes announced it would up its stake in the Wodgina JV with Albemarle from 40% to 50% and take control of operations at the mine.

Shuttered in 2019 just days after MinRes traded a 60% stake to US chemicals giant Albemarle for US$1.3 billion, the first of three 250,000tpa trains at Wodgina is being revived in light of soaring spodumene prices, with first concentrate expected in April this year.

MinRes has also claimed a 50% share of spodumene offtake from its Mt Marion mine near Kalgoorlie from partner Ganfeng from February 1.

MinRes says it expects its first lithium hydroxide sales in May 2022 under a toll treatment arrangement with Ganfeng, but earnings will not be material for this financial year.

It also has a 40% stake in the Kemerton lithium hydroxide plant south of Perth, majority owned by Albemarle, where it expects to be selling chemicals for battery makers from late 2022 from its 25,000tpa first train.

A second 25,000tpa train at Kemerton, the site of a recent Covid outbreak, will be mechanically completed in the third quarter.

MinRes has also signed up to a 50-50 JV to investigate the development of lithium hydroxide plants overseas with Albemarle, which would be operated by Albemarle.