KEY POINTS
- Trafigura has made a $400 million prepayment deal for iron ore with MinRes.
- The deal helps MinRes amid rising debt and weak commodity prices.
- Prepayment deals allow traders to secure resources by financing mining companies.
Commodity trader Trafigura, based in Switzerland has signed a $400 million prepayment agreement with Australia-based Mineral Resources Ltd to access iron ore despite the current volatilities in the commodities industry. Mineral Resources which has been affected by lower iron ore and lithium prices will use this prepayment to ensure cash flow is not affected.
Trafigura’s expanding role in Iron Ore
This deal was announced in July but the identity of the buyer which is now known to be Trafigura was kept anonymous. This move is a clear indication of Trafigura’s determination to expand its business in the iron ore market as it has emerged as a dominant player in the market. Thus, over the period 2012–2022, the company increased the trading of iron ore five-fold to 31 million tons. The trading giant has only furthered in 2024 with iron ore transfers from Australia, Brazil, and India.
To Mineral Resources, this is a cash injection that comes in handy at this time. The company is facing issues with cost increase and deteriorating margins in iron ore ventures than most of its counterpart Australian miners. The amount of $400 million prepayment will also mitigate its financial problem so that it can concentrate on the existing project; construction of Onslow iron ore mine and haulage road. Mineral Resources’ billionaire CEO Chris Ellison was also very transparent about the fact that the company’s primary focus is to maintain cash at the company as it deals with its debt and keeps production ongoing. “We are throwing the entire checklist off the deck to ensure that we can conserve cash,” Ellison said in a call to analysts.
MinRes struggles to maintain cash flow
Mining.com reported that Mineral Resources will have an opportunity to receive a cash injection soon, however, its financial condition is still rather fragile. This Perth-based miner has also been facing a problem of rising net debt which has increased from $698m in the financial year 2020 to $3bn by June 2024. This debt was partially relieved by a prepayment deal of $600 million; however, the company is still under severe financial pressure.
Like any other company, Mineral Resources has also been portrayed to have been making some difficult choices regarding its operations. In the first half of this year, it has withdrawn from the Yilgarn iron ore project citing declining profit margins. The rest of the iron ore projects that the company is still undertaking are some of the most expensive to conduct in the region adding to the challenges.
The prices of both iron ore and lithium which are two of Mineral Resources’ primary products have dropped in 2024. This has affected the company’s stock which is now down by more than 50% since the beginning of May and is at its lowest point since May 2018.
Questions raised about the deal
While responding to the analysts’ questions about the terms of the prepayment deal, Mineral Resources was put on the spot during a recent call. Some analysts expressed concern that the company was parting with more for the $600 million cash advance The analyst, Glyn Lawcock, a head of resources research at Barrenjoey said so.
‘It’s true my parents said there ain’t no such thing as a free lunch,’ Lawcock insisted on knowing more about what Trafigura was being offered in exchange for prepayment. He wanted to know if there was a greater depth to the offer that is a larger discount or interest payment on the bond. However, Mineral Resources has not released much information regarding the details of the agreement and only stated that the terms were nearly the same as other prepayment agreements in the same industry.
