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.
Image source: Getty Images
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.
