Fair points @Slomo - however there are a few assumptions in there, including I guess that the downside is fairly limited from here. In terms of the debt, that is probably true, as the debt repayments aren't due for a couple of years so the company has plenty of opportunity there to "lever pull" as they like to describe it, and not allow those debt repayment obligations to have a serious or permanent detrimental impact on the company's ongoing viability, even if iron ore and lithium prices stay around current levels or fall further. From almost every other perspective however, I think you are definitely taking the glass-half-full view.

One thing is that, as you have correctly pointed out, for many punters Chris Ellison WAS the entire investment thesis for investing in MinRes, and do those people all get out now? Have most of them already exited? I doubt it. True believers often take some convincing that they are or were wrong. So do we see continuing selling pressure over the coming weeks and months regardless of the actual underlying business performance? I think we probably will.

There will be no management premium in MinRes' share price now, that much is clear.

And what does Chris do? - he's the largest shareholder, and he's been given notice that he has to exit the Board and have less say in the ongoing wheeling and dealing that the company does - and can no longer treat it like his personal family investment house. So does he sell down a significant portion of his MinRes holding so that he can invest that money as he sees fit, without having to answer to anybody? It's probably a valid option for him. After all, it's how he built the company, and if he can't do it in the future through MinRes, why not cash out, at least partially, and do it privately? I don't think Chris has likely lost the passion for the deal - it's going to be in his blood.

Also, given the governance concerns that have already being raised and are continuing to be raised by the AFR, and the fact that the Board have been investigating many of these matters for over 2 years already since an official complaint was made by a whistleblower, and the Board have only chosen to act NOW because the matter is in the daily news and the ASX has provided them with a "Please Explain" letter, has the Board got any credibility really? If you're a large iron ore miner like BHP or RIO, is this the sort of company that you want performing such a large contract on your site on an ongoing basis? Do the ESG concerns, specifically the governance concerns, cause any concern for these global miners when contracts come up for renewal? That's the thing that might impact CSI, the one division within MinRes that is clearly profitable. Are they going to continue to win contracts or roll-over expiring contracts at the same rate as they have in the past?

Next, even if people don't perceive further share price downside risk with MinRes, how about having a management team that you can trust to operate in the best interests of shareholders, the owners of the company, when they clearly haven't been doing that very well in the past? Short of a clean-sweep of the Board and senior management, which is unlikely in my view, and in itself would present different risks, we're still going to have people there who were in positions of influence during the past few years and failed to act appropriately until they were forced to by a media expose.

So, I guess the investment thesis for MinRes is similar to tobacco companies in recent years, keep holding your nose and focus on the potential returns if things don't pan out as bad as the bears are expecting them to.

Here's a link to what the Money of Mine podcast crew had to say about today's announcements and revelations:

MinRes Scandal to see Ellison Exit. Now What? Money of Mine podcast: Monday 4th November 2024.

Correction: I've just fixed that link.

Thanks for the reality check @Bear77.

Yes, my thesis is chock full of assumptions. I guess I am trying to take a longer term view to see the opportunity form a lot of short term ... signal. There's some noise here for sure, but a lot of 'signal' too no doubt.

I'm reminded of @Solvetheriddle's rule of "3 if's and your out", if I'm remembering that correctly?

To take a longer term view you need a sense of the future - hard enough in a stable company exposed to commodity prices... degree of difficult here is higher for sure with more uncertainty than usual and I agree you thoughts that "it ain't over yet".

In an earlier write up (not posted here) I contemplated a break up of MIN and concluded that this would amount to asset sales which they routinely do anyway - the key question I had around this was would they be done 'in an orderly manner'.

I reckon with MD & Chair in situ for 12+ months (if that stands) there won't be a fire sale any time soon.

You're right that I'm taking a glass half full view. Given the track record of this business in terms of project delivery I expect them to deliver on Onslo and Lithium project potential (from a cost and production and cost of production perspective anyway). Of course I could be wrong about this but they are hard assets and I'm assuming they have been identified and developed well - this seems to be the case so far although they definitely were too early in the cycle for lithium acquisitions.

Management premium has turned into a discount I believe, but could be wrong here. I'm actually hoping there's more selling pressure from capitulation from the CE thesis crowd, broker downgrades (also likely including some CE acolytes), etc. Plus whatever exciting headlines shake out the looser hands.

I guess I am also assuming that all the cockroaches have scuttled out of the kitchen - the big ones anyway. When ASIC looks behind the fridge there could be a lot more scuttling but I am expecting this won't take down the whole ship. I could be wrong about this but I'd be surprised and we're not too far off break up value I reckon. As long as the crushing and services business was to be sold as a going concern. If it was shuttered that would have knock on effects on one of the highest tax paying industries in AUS.

So I am not probability weighting or incorporating any catastrophic outcome potential. I am expecting they will dance through this in a less than elegant way but won't end up getting scraped off the dancefloor and removed in a bucket.

I thought about whether they could lose business too - here's what I wrote to myself (before CE was axed): Are they likely to lose customers / business – given their long track record and reputation in the industry they’ll still likely retain their existing LT contracts / achieve renewals. Certainly in crushing where they are the only stand alone scale provider. They should even win new work in this highly cost competitive environment – especially with their reputation for delivery.

ESG could be an issue - especially with growing scrutiny of the supply chain. I think if they were pinged for slavery, yes, this would be an issue. But for their customers (not consumer facing) and the nature of governance issues - board capture, defrauding the ATO, shareholders, etc I can't see this overriding cost & reliability considerations. Again, I could easily be wrong about this.

I don't see this as a tobacco company situation. I see them an an unethical (to me) melting ice cube. I see MIN as a long term compounder with plenty of investments in growth that have not yet paid off, short term issues (depending on your timeframe and definition of 'issues').

I think there's a real risk I am trying to "look past" real issues that will impact the company - and they are.

I would / will be surprised if this business is allowed to be damaged to the extent that current share price represents fair value.

Appreciate your thoughtful rebuttal @Bear77! You asked some excellent questions that really got me thinking. Really appreciate you applying some pressure to my thesis - especially as you clearly know the business well.

As an aside: I find the MoM guys hard to listen to. Maybe they're afraid of getting sued or run out of town but there's a lot of nudge nudge wink wink with therm instead of substance. They're pretty good at rehashing ASX Announcements but I don;t hear any real insights or connections beyond that. I get that it's supposed to be entertaining and the vibe is a few mates catching up over a beer without the beer but it seems too light to be useful for me. Maybe I've not watched them enough or it's just not my thing but I've seen maybe 5 eps and learnt nothing from any of them. Although if I am slow learner, that would explain a lot!

Fair enough @Slomo - and I don't regard MinRes as equivalent to tobacco - I was just using that to illustrate a point - that some people won't care how the business is run, or the honesty and integrity of the people running it, as long as the company keeps making them money. I don't take that view. I sleep better when I feel the management of the companies that I have chosen to invest in are making decisions that are in the best interests of shareholders and are focused on longer-term value creation for the company, rather than for themselves as individuals. Usually the founder or manager having most of their personal wealth in the company in the form of shares and/or options is going to produce such alignment, but not always, clearly.

One thing that Trav said today in the podcast sticks with me - that many people would have thought that despite his character flaws, Chris Ellison was on "our" team, meaning MinRes' shareholders' team, but now it seems that sometimes he was on "his" team. That certainly sums up why I won't be investing in MinRes now, despite the break-up value of their assets.

Definitely a "Qantas" moment for Minres right now

Everyone was calling Qantas the "Big Short" on Strawman and Twitter and saying it was an easy short sell at $5.

But look what happened after Alan Joyce left? How wrong we all are.

Qantas shorters got burned at the stake around $5.

Like Qantas at $5, I say the downside is nearly priced in.

Tempted to dive back in.

Makes sense @Bear77. You've described a more prudent way to invest. Having smart, hardworking, honest management is a prerequisite for Buffet and co for a reason and you do sleep better at night knowing that's who's running your business.

I generally put a lot of stock in management - especially for smaller businesses where they can have an outsized influence. MIN is not small but the influence of CE is huge.

I can understand why some red lines can't be crossed for different investors. And you won't find many that will be OK with what he has done - I'm not OK with it.

I always try to think about my conviction in a business as separate to the opportunity. A great business at a terrible price can be a bad investment, and vice versa. Maybe I am taking that a little too far here.

It's far simpler to say that if management have shown they're not aligned with shareholders - in fact taking advantage of them, it's a red line not to cross. And simplicity is usually your friend in investing.

Maybe this is a lesson I still need to learn but I am trying to weigh what management have done (that we know about), what I think the business is worth and if the elevated risk is more than compensated for in the price.

I may also be too contrarian here or just too busy trying to outsmart myself. The combo of commodity price exposure, a mountain of debt and dodgy management sounds like the start of a joke, not a sound investment thesis.

But I still think it's a worth a lot more in the long term than current price suggests. To some investors it's not worth any price. I may be in the process of becoming one of them...

If I wake up in the middle of the night and place a sell order at market, I'll let you know

Disc: Still held (as at bedtime)

@Slomo my 2c if iron ore stays above $100/t , all will be well, the cash flow will be huge and a happy ending for s/h will eventuate. if Fe falls to $75/t then all bets are off. if i had high conviction on that i would back the truck up. but i don't, that's commodities' for you, its a speculation, good odds but still speculation. too many moving parts for a big bet, imo. held-- im speculating in speculating size..

Just listened to that MoM pod episode @Bear77, thanks for recommending it.

Lots of rehashing of the announcement but some decent coverage of adjacent issues.

Made sense rebutting the Glencore takeover rumour that popped up somewhere as they can't debt fund it and wouldn't equity fund it. But also canvasing that Gina might take it private - which would keep her pal at the wheel and add some nice reliable cashflow to her portfolio (but raises questions about whether her customers would want to use a competitor for crushing longer term).

Kinda strengthened my resolve that there's a lot more smoke than fire here. Even though there's plenty of fire, there's just a lot more outrage. It's clearly fun to be righteous and join a pile on, especially when a big talking success story is exposed and shamed in public.

A lot of media types are getting clicks from cutting down (by 1,000 cuts) a tall poppy who they helped build up when he fit the narrative of rags to riches success story.

Good luck to them, that's their business model and the 9 papers will be happy to throw stones that deflect attention from their own glass houses. Good opportunity for virtue signalling from them too.

There's a decent chance I'm believing what I want to be true though...

Either way it will be a slow road back for MIN I expect and while uncertainty remains high, share price will likely remain low.

Disc: Held

I really should stop banking on about this, but really just thinking by writing and hopefully it's of interest / easily rebutted by someone wiser.

The current angle on MIN in the AFR says "... when that core group of shareholders is so out of line with the prevailing view in wider equity and debt capital markets, you have to question whether listening to shareholders is a long-term own goal."

https://www.afr.com/chanticleer/why-every-director-should-fear-a-minres-on-their-watch-20241105-p5knx2

But all 4 MIN bonds are trading above par - that is at a premium to their redemption price (100).

https://www.tradingview.com/symbols/ASX-MIN/bonds/

The printed opinions of journalists are worth less to me than the cash of investors, especially bond investors. So more smoke than fire here too it seems?

Bond pricing as a signal

There's a little more to it than this - bonds trade at a premium / discount based on interest rate changes and credit risk of the issuer.

If interest rates haven't changed across the term structure since the bonds were issued (they have) then bonds should trade to reflect the market's assessment of the issuer's (MIN's) credit quality relative to when they were issued - either at a premium (improved quality) or discount (deteriorated quality).

Without crunching through all the history, I would expect the bonds to trade at a slight premium as interest rates seem to have entered a loosening cycle since the bonds were issued - because fixed interest streams are worth more as market interest rates fall and vice versa.

But if there were serious credit quality concerns over MIN in the bond market, these would likely offset this effect, pricing the bonds at a discount.

The bond market is usually thought of as more efficient than the equity market and it should be (I certainly think that it is).

So this is another real world, long term indicator that fundamentals at MIN may not be so dire and it's ability to pay its debts has not been damaged - not in any significant way (so far).

Yes @Seymourbutts - and it ain't over. The drip-feeding of allegations continues with today's AFR article: https://www.afr.com/companies/mining/minres-paid-a-70pc-mark-up-to-rent-chris-ellison-owned-properties-20241021-p5kk1v

MinRes paid a 70% mark up to rent Chris Ellison-owned properties

Neil Chenoweth and Mark Di Stefano

Nov 4, 2024 – 5.00am (AFR)

Mineral Resources founder Chris Ellison and other senior executives charged up to 70 per cent above market rates for industrial properties that they have leased to the diversified mining group since 2006, according to independent valuations they themselves commissioned in 2020.

The valuations by Knight Frank raise questions about aggressive rent increases which have resulted in MinRes paying $31.6 million to lease the Ellison properties since the company listed on the ASX. People close to MinRes, speaking on condition of anonymity, estimated that the West Australian group may have overpaid up to $10 million for the properties.

MinRes was founded by Mr Ellison and has expanded from mining services to own iron ore projects, lithium developments and energy assets. It has grown into a company with a market capitalisation of more than $7 billion.

But allegations, first published by The Australian Financial Review last month, that Mr Ellison and other senior figures had enriched themselves through an offshore tax scheme at MinRes’ expense have sent the company’s share price sinking. MinRes said it was investigating the matter, and will publish the results of its inquiries on the ASX on Monday.

The Australian Securities and Investments Commission has also confirmed it has launched a preliminary probe into the matter.

Mr Ellison is now poised to make windfall profits as he sells the four properties in Kwinana and Bibra Lake, two suburbs in Perth’s south, whose values have been boosted by 10-year leases recently signed by MinRes.

In May 2020, Mr Ellison and the other executives who owned the four properties through a series of trusts commissioned Knight Frank to provide them with a detailed valuation of the real estate.

The firm valued the properties at $17.5 million, and said that the market rate for rents across the four combined should total $1.27 million.

Six weeks later, rents charged to MinRes were lifted 4.5 per cent to $2.22 million, $945,000 more than the Knight Frank estimate. The higher lease arrangements represented a 74 per cent premium on the market rate.

The last lease on the four properties ran for five years from July 2015. Two adjoining properties in Thorpe Way, Kwinana, were leased for $420,000 a year with annual increases of 3.25 per cent; 25 Wellard Street in Bibra Lake for $440,000 with 4.75 per cent annual increases; and nearby 147 Barrington Street for $914,600 with 5 per cent yearly increases.

In 2016, MinRes listed $1.78 million paid in rents to related parties, noting in its annual report that “all transactions were made on normal commercial terms and conditions and at market rates”.

The leases were set to expire at the end of June 2020. When no new lease was drawn up, MinRes continued to rent the properties on the previous conditions – which meant a 4.54 per cent rise, or $96,000 more, from July 1, making the miner one of the few companies to have increased the amount it paid in rent right in the middle of the COVID-19 pandemic.

The rents rose another $100,000 in 2022. They have been frozen at that level – $2.3 million – for the past two years. The last MinRes annual report noted that “rental fees and payment terms are reviewed and revised periodically”.

The rent freeze came amid an investigation by Herbert Smith Freehills triggered by a complaint to the board about Mr Ellison and other executives. MinRes disclosed last week that it had tasked the law firm more than two years ago to investigate a complaint that alleged Mr Ellison, former chairman Peter Wade and three founding executives had used a British Virgin Islands company to sell machinery to the group at huge markups. MinRes’ announcement did not reveal the wide scope of the investigation.

The Financial Review has obtained a copy of the complaint – dated June 3, 2022 – and other emails which indicate that the British Virgin Islands scheme is only one of a number of claims made against Mr Ellison and senior managers that Herbert Smith Freehills is investigating.

These included excess profits from the above-market rents, which the complaint alleged had cost shareholders millions of dollars, and claims that MinRes required shipowners carrying its cargoes to use the services of Ship Agency Services, owned by Mr Ellison’s daughter Kristy Lee Craker.

SAS operated out of Wellard Street in Bibra Lake, one of the properties leased by MinRes from Mr Ellison and the other executives. Days after the investigation began, MinRes auditor RSM Australia told ASIC that it was no longer the registered office for SAS. Six months later, SAS moved out.

MinRes says that SAS, which has earned more than $10 million from its work transporting the company’s cargoes, is paid at market rates.

It was in this period that rent on the properties was frozen. They are now for sale, with Wellard Street offered with vacant possession. The new 10-year leases begin on December 31, with 3.5 per cent annual increases. Rent for Barrington Street has been cut by 20 per cent, a saving of $250,000 a year.

--- ends ---

I note that in today's Update-on-corporate-governance,-leadership-succession.PDF announcement to the ASX by the MinRes Board, they say the following:

Conclusions in relation to Mr Ellison’s conduct:

Taking into account these broader allegations, as well as the matters noted above in relation to FEEHL, the Board has formed the view that:

• While he has co-operated with the current investigation, over the lifespan of the matters being investigated, on some matters, Mr Ellison has failed to be as forthcoming with the Board as he should have been.
• At times, Mr Ellison has not acted with integrity, which sits at the core of the Company's values.
• Mr Ellison has not fully appreciated the importance of transparent and timely disclosure of matters that could give rise to a potential or actual conflict of interest, in particular with respect to related party transactions.
• Mr Ellison has not placed sufficient separation between his personal interests and the interests of the Company as a whole.
• These matters have adversely impacted MinRes' reputation and called into question the confidence of its shareholders and other stakeholders in its leadership.

--- end of excerpt --- [some sections made bold by me to point them out] 

CE's actions have clearly impacted MinRes financially, which the MinRes Board have only accepted in terms of making him pay back the $3,790,607 that MinRes paid to FEEHL in 2006 and 2008 without adequate related-party disclosure - as Chris was the majority owner of FEEHL, a private company based out the British Virgin Islands (BVI, who have a zero% corporate tax rate).

The MinRes Board have so far said that every other matter, including the multiple discounts and freebies provided by MinRes to Chris Ellison's daughter's companies that they admitted to in today's announcement, have NOT had any material effect on MinRes financially and will NOT result in any financial penalties to CE other than losing his unvested options/shares - i.e. his unvested long term and short term incentives (LTIs and STIs). I note that all of the STIs and LTIs that have ALREADY vested are being kept by Chris - none of those are going to be paid back. There's a $5m donation to charity over 5 years ($1m p.a.) but that hardly repays any financial loss to MinRes shareholders for CE using the company to feather the nests of himself and his family and his mates over the entire period it has been a listed company.

MinRes said today: "The Board has also concluded that Mr Ellison, on occasions, used Company resources for his personal benefit. This has included: directing Company employees to work on his boat and properties; directing a Company employee to manage his personal finances; and using the Company to procure goods and services for his private use. The Board is satisfied that the use of MinRes resources and assets in this way has not caused material financial detriment to the Company. Where Mr Ellison has used the Company to procure goods and services, procedures existed to ensure that he paid the Company for these goods and services."

They also said: "From time to time, financial benefits have been provided to related parties of Mr Ellison, including: rent paid to entities in which Mr Ellison has an interest; rent relief afforded to entities in which Mr Ellison’s daughter has an interest; and indirect financial arrangements involving an entity in which Mr Ellison’s daughter has an interest."

I fully expect that the AFR's premier investigative journalist, Neil Chenoweth, will continue to drip-feed further allegations to us over the coming weeks and months - backed up by evidence - as today's AFR article has been - and this is not over yet.

Today's MinRes announcement said:

Mr Ellison has apologised to the Board. He has confirmed that:

• there are no matters not already known to the Board for him to disclose that would or could bear upon whether he is a fit and proper person to continue in the role as Managing Director; and
• there are no undisclosed transactions between the Company or its subsidiaries and entities associated with him. 

--- end of excerpt ---

So either Chris is lying, or the Board already knows about additional matters such as those disclosed in today's AFR article and are not addressing those matters publicly. For every additional allegation that the MinRes Board has failed to deal with publicly, further damage to their own reputation will be done - so it's no wonder that their non-executive Chairman, James McClements, is stepping down from the Board.

It ain't over yet.

Price action seems to be saying the news on Ellison and Clements is priced in. Any more bad news from them I believe will be limited since we know now they are going anyway.

Unless we see another executive fall on their sword or maybe the gas transaction falls through, doubt it's going any lower.

This is the same thing that happened with Qantas last year with Joyce. Big mistake selling at $5 (now above 7 and possibly paying dividends soon despite the looming Capex for new planes). Even bigger mistake to those talking heads telling everyone to short Qantas. Which reminds me I got to clean out twitter/X feed of the people that said to short Qantas.

Sometimes it pays to look at the other side. Not financial advice but obviously anyone interested in minres now should have another think