MinRes 8.125% May 2027s
The MinRes 8.125% May 2027s have cheapened up amidst the volatility and now provide a better entry point for investors. In our view, a call in May 2023 onwards is more likely in the current environment and would provide investors with a yield to call (YTC) above 6%.
This would also appeal to investors who prefer USD exposure and are of the view that the AUD/USD is likely to depreciate over the next twelve months. The company remains in a very low net debt position, after sitting on a net cash position for the past two years. However, credit metrics are well above Moody’s Ba3 ratings downgrade triggers.
MinRes remains a strong credit despite the fall in iron ore prices that occurred over H1 2022 and challenges associated with COVID-19. However, it does remain susceptible given its lower grade iron ore and higher cost of operations relative to the majors BHP and FMG. Iron ore prices have since recovered from USD87/t in early November 2021, rebounding to USD150/t in early 2022 − which bodes well for FY22 results.
MinRes’ long-term strategy over the next 3-5 years will be to progress the 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 BHP and FMG on costs.
MinRes is also increasingly focused on its investments in the lithium space. MinRes exported 207,000t of spodumene from its Mt Marion mine during H1 2022. The company announced it would increase its stake in the Wodgina JV with Albemarle from 40% to 50% and take control of operations at the mine. Prices for spodumene and downstream chemicals are at record levels.
Markets are volatile and MinRes only has around AUD750m cash on its balance sheet to use to retire the USD700m line. The hope for MinRes would have been to refinance at a lower rate than the 8.125% originally issued out − which, prior to market volatility, fall in iron ore prices over H1 2022, and challenges associated with COVID-19 − was looking likely.
FY21 results were excellent, helped by the resurgence of iron ore prices recently over the start of CY22. MinRes is also now sitting on a net debt position after sitting on a net cash position for the past two years.
Chart 1. MinsRes Callable Dates
The below relative value chart uses yield to worst (YTW) in 2027, which is a conservative metric for analysing an investor’s return potential. In our view, a call in May 2023 onwards is more likely in the current environment and would provide investors with a yield to call (YTC) above 6%. For what is effectively a BB-style credit, this compares favourably to other high-yield securities, noting that both Adani and Infrabuild have considerable credit risk.
The upside, if the company decides to call, is that investors would receive a yield to call (YTC) of close to 10%.
Chart 2. Relative Value
Source: IAM Capital Markets, Bloomberg