Since hitting a seven-year low of $3.34 in mid-January of this year, shares of Mineral Resources Limited (ASX: MIN) have staged a remarkable turnaround and are now trading at $9.57 – a gain of 186% in the space of only five months!
The only other company of note in the iron ore sector that has come close to matching this performance is the highly leveraged Fortescue Metals Group Limited (ASX: FMG), which has seen its share price climb around 120% in that time.
One of the obvious reasons behind Mineral Resources and Fortescue's impressive share price recoveries has been the bounce in the iron ore price.
After bottoming out around US$40 per tonne in late December 2015, the iron ore price managed to climb back towards US$70 per tonne in late April.
What is interesting to note, however, is that Mineral Resources' share price has continued to climb higher over the past couple of weeks, even as the iron ore price traded back towards US$50 per tonne.
One of the big reasons Mineral Resources has continued to climb higher, I believe, is its exposure to lithium.
Lithium has become the latest 'boom' in the resources sector and Mineral Resources is one of the few major miners that looks set to take advantage of rapidly increasing lithium prices. The company owns a 43.1% stake in the Mt Marion lithium project which is expected to begin production over the next few months.
The Mt Marion project is expected to make a significant contribution to Mineral Resources bottom line with the company expecting an annual EBITDA contribution of around $35 million once it enters full production.
This is in stark contrast to most of the other players in the lithium sector who are either still in the discovery phase, or still in the very early stages of mine development and who may never realise the benefits of the recent surge in lithium prices.
A second reason I think the share price has continued to strengthen is that investors are now pretty confident that the company will meet its full year guidance.
At its half year results in February, Mineral Resources confirmed it will aim to generate EBITDA of between $250 million to $290 million based on an average iron ore price of US$42 per tonne, an Australian dollar at US$0.70 and if production is not interrupted.
With less than one month to go until the end of the financial year, all of the company's key assumptions have been met excluding the average exchange rate (which has been more than offset by strength in the iron ore price). As a result, investors can be confident that there will be no negative surprises when the full year results are delivered in August.
The third and final reason behind the strength of Mineral Resources' share price performance comes down to a massive short squeeze.
As the chart below shows, the company was one of the most heavily shorted stocks on the ASX for the best part of 2015, with short positions peaking at nearly 17% in November 2015.
Since the company released its better-than-expected first half results in February 2016, the number of short positions has fallen sharply and short positions are now sitting just over 3%.
This is an excellent example of how share prices can bounce when short sellers are forced to cover their positions.
Should you buy?
There is little doubt that Mineral Resources is one of the best managed miners/mining service providers on the ASX but, just like every other company in the sector, it has to grapple with factors beyond its control.
For this reason, investors buying shares of Mineral Resources today must be convinced that iron ore and lithium prices can track higher from here.
