Possible lithium spinoff makes Mineral Resources share price undervalued: Credit Suisse

Credit Suisse is onboard with a potential pot of gold for Mineral Resources' shareholders…

| More on:
Pilbara Minerals engineer with hard hat looks through binoculars at work site or mine as two workers look on

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • The Mineral Resources share price stormed 13% higher on Friday to $71.50
  • Analysts at Credit Suisse think a lithium spinoff could create immense value for shareholders
  • One US-listed lithium peer boasts an earnings multiple of more than 130

Aristotle once said, "The whole is greater than the sum of its parts." Perhaps the Greek philosopher never heard of a demerger. Circulating rumours on Friday have led many to believe that the management team at Mineral Resources Limited (ASX: MIN) has not only heard of a demerger but is even contemplating one.

Shares in the mining services company were engulfed with buy orders today. In the process, the Mineral Resources share price shifted into high gear and raced 13.6% higher to close at $71.51. For context, the S&P/ASX 200 Index (ASX: XJO) found its own momentum, gaining 0.76%.

The powerful outperformance by Mineral Resources can be traced to media reports regarding the company's lithium business. As previously reported by The Motley Fool, these whispers reveal a potential spinoff of the mining giant's lithium division.

One broker has already given the company its blessings.

Pure lithium play could command a premium

The Mineral Resources share price has ridden the wave of the commodity boom. However, the various components of the business could be more of a hindrance than a help.

For some background, Mineral Resources is a company with mining services, iron ore, gas, and lithium all rolled into one. In one regard, this can be good for diversification. However, when one portion of the business is shining far brighter than the others, it can drown out by the other less glamorous gowns the company is wearing.

At the moment, the star of the show is lithium. Credit Suisse believes it makes sense to separate the belle of the ball from the less desirables.

Amid Friday's news, Credit Suisse detailed their estimates on the potential value unlock, stating:

We see MinRes as presenting four businesses for the price of one, with the lithium division potentially worth as much as the current entire MinRes valuation if it were to trade standalone in line with international peer multiples.

In other words, the team at Credit Suisse proposes that the value to shareholders could possibly be around double. By spinning off the lithium division and listing it on the United States market, the true value of the Mineral Resources share price might be realised.

How the Mineral Resources share price compares

For those wondering, we already have a comparable US-listed lithium giant to better understand Credit Suisse's case. Albemarle Corporation (NYSE: ALB) is one of the world's largest lithium producers. Although, its earnings for the trailing 12 months only slightly pip Mineral Resources, at A$385 million converted.

This is where it gets interesting — Mineral Resources trades on a price-to-earnings (P/E) ratio of around 38 times. Whereas, Albemarle has hooked a face-melting 131 times earnings multiple.

In essence, Mineral Resources' lithium division needs to only be generating $100 million in profit at a 131 P/E ratio to command a market capitalisation equivalent to the entire Mineral Resources company today.

Motley Fool contributor Mitchell Lawler owns shares in Albermarle Corporation. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Materials Shares

A group of miners in hard hats sitting in a mine chatting on a break as ASX coal shares perform well today
Materials Shares

Down but not out: Can these ASX mining shares bounce back?

Here’s what one broker is predicting for Australia’s largest mining companies. 

Read more »

Broker analysing the share price.
Materials Shares

Buy, hold, or sell? Broker's verdict on 3 ASX 200 materials shares

Materials was one of four market sectors that weakened in overall value in FY25.

Read more »

A man holds his head in his hands, despairing at the bad result he's reading on his computer.
Materials Shares

Why is this ASX mining stock crashing 14% today?

Let's see what is causing investors to hit the sell button on Monday.

Read more »

Three miners stand together at a mine site studying documents with equipment in the background
Materials Shares

$10,000 invested in BHP shares in FY25 is now worth

Did the Big Australian outperform or underperform during the last financial year?

Read more »

A male investor sits at his desk pondering at his laptop screen with a piece of paper in his hand.
Share Market News

Why did Macquarie just downgrade Liontown resources shares?

Here’s what the broker had to say about this materials company. 

Read more »

A man holds his head in his hands, despairing at the bad result he's reading on his computer.
Materials Shares

Why did Macquarie downgrade Mineral Resources shares?

The broker is no longer bullish on this mining and mining services company.

Read more »

A bricklayer peers over the top of a brick wall he is laying with a level measuring tool on top and looks critically at the work he is carrying out.
Materials Shares

Brickworks shares rise 1% on trading update

Investors seem delighted by a new update from Brickworks.

Read more »

A man wearing a shirt, tie and hard hat sits in an office and marks dates in his diary.
Materials Shares

Does Macquarie prefer Rio or BHP shares today?

Let's find out which mining giant is the better pick right now according to the broker.

Read more »