Fitch Ratings: Mineral Resources' Revised Wodgina Sale Terms Credit Positive

(The following statement was released by the rating agency) Fitch Ratings-Sydney-August 01: Mineral Resources Limited's (BB/Stable) proposal to revise the terms of the sale of the Wodgina lithium project will strengthen the company's financial profile, Fitch Ratings says. The revised terms, if implemented, include lower upfront cash receipts, although this will be offset by capex savings over the next three years, which will allow the company to deleverage faster than previously expected. Mineral Resources on 1 August 2019 said it agreed with Albemarle Corporation (BBB/Stable) to revise the terms of the previously proposed sale of a 50% stake in the Wodgina project for USD1.15 billion in cash. Under the revised agreement, Mineral Resources will sell a 60% stake in the project for USD1.3 billion, comprising USD820 million in cash and a 40% interest in the first two trains (about 50,000 tonnes per annum) of a lithium hydroxide plant in Kemerton that Albemarle is constructing. The lithium hydroxide plant has a planned capacity of about 125,000 tonnes per year, with Mineral Resources to receive a 40% free carried interest in the first 50,000 tonnes per annum of capacity. The plant is due to be commissioned in early 2021. As part of the agreement, Albemarle will be solely responsible for managing the construction and commissioning costs of the first two trains at the Kemerton plant. Mineral Resources' share of the costs to complete the plant is USD480 million and it will be insulated from any cost overruns. The company will also receive any cost savings should its share of the final construction and commissioning costs be less than this figure. Mineral Resources has also postponed its plan to build a hydroxide plant at Wodgina until the Kemerton plant is fully commissioned. As a result, Fitch expects the company to achieve around AUD300 million in capex savings from FY20 to FY22. Further, the earlier commissioning of the Kemerton plant means that Mineral Resources will begin sales of lithium hydroxide at least 12 months earlier than would have been possible had it proceeded with the original plans for construction of the Wodgina plant. Fitch also believes that the Kemerton plant has a much lower operating risks than that of Wodgina because Albemarle has stated that it expects the majority of its 2021 lithium hydroxide capacity, which includes the first two trains at Kemerton, to be sold under existing long-term agreements. Fitch still forecasts Mineral Resources' FFO adjusted net leverage to improve to below 2x in FY20. However, we now expect the metric to remain below this level until such time that Mineral Resources and Albemarle commence construction of a hydroxide plant at Wodgina due to the deferral of the company's planned capex and earlier sales of lithium hydroxide. We had previously forecast that this metric would rise above the guidance in FY22 as it absorbed the cost of the Wodgina construction prior to sales commencing. Fitch believes the strengthening of Mineral Resources' financial profile will also allow the company to weather any weakness in the spodumene price or sales volumes from the Wodgina lithium mine. Although our current forecasts show leverage remaining below 2.0x until at least FY23, which is the level that we would consider positive rating actions, we would not take any rating action until there is more clarity around the delayed construction of the Wodgina hydroxide plant and the impact on Mineral Resources' financial position. Mineral Resources aims to complete the revised agreement by end-2019. The agreement remains subject to approvals from Australia's Foreign Investment Review Board and China's State Administration for Market Regulation. 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