Under the Spotlight AUS: Mineral Resources (MIN)

Mineral Resources ($MIN) CEO and founder Chris Ellison warned in August that ‘we’re throwing everything off the deck just to make sure we can preserve cash’. 

Less than three months later, he’s set to walk the plank after a damning assessment by the board into alleged tax evasion and use of company resources for his personal benefit. The Rich Lister will exit in 12-18 months. 

It caps a horrible year for the mining services provider, which also produces lithium and iron ore from its own mines. Weak iron ore and lithium prices, concerns the balance sheet carries too much debt and no final dividend have made Mineral Resources one of the most shorted stocks on the ASX. 

With the Chair also set to depart, this week’s boardroom shakeup adds to the uncertainty that has pushed the stock down 60% from its January 2023 record high. Shares traded at a four-year low in September. 

Bo Derek of mining

The news of the CEO’s departure sparked a 10% slide in the share price on Monday. The reaction reflects how Ellison is viewed as synonymous with MinRes’ success. From its 2006 IPO as a mining contractor, he transformed MinRes by expanding into mining its own operations. 

There are some fund managers like L1 Capital that don’t want Ellison to go. Even the board acknowledged he’s ‘high performing’ and ‘value creating’. However, improving governance should restore the reputation of a company that has a history of strong revenue and profit growth. 

Revenues grew from $1.3b in FY15 to $5.3b in FY24 thanks to contract wins in mining services, iron ore and lithium acquisitions as well as new projects. Underlying EBITDA is up from $283m to $1.06b over the same time. That growth helped lift the shares from an IPO price of $0.90 to a peak of $96 in January 2023. 

MinRes has a reputation for innovation in mining services, which account for around $550m of underlying EBITDA. From modular crushing plants to autonomous road trains and transhippers, the company’s technology allows for more efficient mining and lower costs – not just at its own mines, but also for blue chip clients like BHP ($BHP) and Rio Tinto ($RIO). Mining services’ September quarter production volumes rose 11% quarter-on-quarter (QoQ). Ellison is not shy in talking up the reputation of its mining services unit: ‘We’re the Bo Derek, we’ve got all the good shit going on,’ he said on an analyst call in February. 

1800 G-I-N-A

Despite this prowess, Mineral Resources’ balance sheet has been in analysts’ crosshairs this year. Growth in the lithium and iron ore businesses may have diversified revenues, but as these account for about $780m of underlying EBITDA, it has also exposed MinRes to weak prices for both commodities. That’s caused some discomfort given net debt of over $4b at the end of FY24. 

MinRes was forced to cut costs. More than 500 jobs have gone, rosters have been changed, surplus equipment sold and underground construction at its Mt Marion lithium mine has been deferred. ‘This is the shittiest time to be the MD of a company,’ said Ellison on the full year earnings call in August. 

Asset sales have provided some relief to the strained budget. Ellison’s working relationship with fellow West Australian Rich Lister Gina Rinehart, Australia’s wealthiest person, has paid off. Rinehart’s Hancock Prospecting paid $1.1b for MinRes’ energy assets earlier this month, with $804m in cash paid upfront. A 49% stake in the Onslow Iron haul road was sold to Morgan Stanley Infrastructure Partners for $1.3b in June. The balance sheet has moved past peak debt.  

This provides breathing room as MinRes ramps up production at its Onslow Iron project. It remains on track to achieve its nameplate capacity of 35m tonnes from June 2025, which will boost revenues and earnings. The company has maintained its volume and cost guidance for FY25. However, it’s still captive to commodity prices. The realised iron ore price across its three iron ore hubs fell 15% QoQ to US$82 a tonne in the September quarter. Lithium prices across its three mines fell 32% QoQ to US$815 a tonne. 

Hot seat

The governance reset – much needed to restore investor confidence – means that Mineral Resources is heading towards a future without its money-making founder. However, Ellison will remain around long enough to provide a steady hand in ramping up Onslow Iron and battling through weak commodity pricing. 

Whoever succeeds him in the hot seat will have big shoes to fill, but should inherit a portfolio of assets that can deliver when the prices are right.  

This does not constitute financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.