Pinned straw:
Joseph Taylor
Welcome to the next edition of Ask the analyst, where we put your questions about ASX stocks under our coverage to our equity research team. If you have a question, please send it to [email protected] and we may feature it in a future article.
Today’s question comes from Greg C, a Morningstar reader and Mineral Resources (ASX: MIN) shareholder from Adelaide.
Greg’s email said the following:
“I have owned MinRes for a long time and have been through a few sell-offs. I’m not enjoying this one, though! The stock is down almost 50% this year and it has been in the headlines a lot too. Any thoughts on the main causes of the sell-off?”
For those of you less familiar with MinRes than Greg will be by this point, let’s start with a very quick overview of how it makes money.
MinRes is home to two very different business segments: mining services and mining.
Our MinRes analyst Mark Taylor still considers the company’s traditional mining services business to be its core. For a few years, though, earnings from these operations have played second fiddle to those from iron ore and lithium mining.
The split in 2024 was roughly 40% mining services, where MinRes owns and operates crushing and screening facilities located at its own and other companies’ mines – and 60% from mining iron ore and lithium.
Iron ore has traditionally made up most of this, but the mix varies because of changes in commodity prices and production levels. In 2022, iron ore was 78% of revenue, in 2023 it was 55% and in 2024 it was 68%.
“Now that MinRes’s Onslow iron ore project has come online, I expect iron ore to be 80% of the mining segment’s revenue in 2025” says Taylor. “In 2026, I think that will fall back to two-thirds as we forecast that lithium prices can recover a bit”.
The relative earnings contribution and different nature of these two segments account for much of what has been driving MinRes’s share price movements.
Revenue and profits from MinRes’s mining services business are tied to production levels at the company and its clients’ mines. These have some potential to vary with commodity prices, but this business has generally been steadier and more predictable than the mining segment. It has long contracts at mines that are less impacted by downcycles, and its clients have little reason to find a new supplier.
By contrast, profits in MinRes’s mining segment are highly leveraged to commodity prices. All the more because most of the mines it owns are not particularly low-cost operations. This is especially true for their iron ore mines, which sit higher on the cost curve than many peers due their low-grade ore.
Onslow’s long-life and lower cost profile will help in this regard, but MinRes is still highly reliant on favourable iron ore prices. MinRes’s lithium operations are slightly better placed but still have higher all-in costs than several assets including IGO and Albemarle’s Greenbushes mine.
Add this together and you get a company that has a bigger, growing and more leveraged portion of its earnings coming from mining. Hence MinRes generally trading far more like a mining pureplay as opposed to a mining services company that also owns mines.
The fall in lithium prices has been especially hard on MinRes shares in recent years. Iron ore prices coming off from 140 USD at the start of 2024 to around 100 USD per ton hasn’t helped either.
Most of the weakness in MinRes shares this year, then, can be accounted for by commodity prices. But more recently they have also been hit by uncertainty over the future role of its founder Chris Ellison.
Allegations of tax dodging and personal use of company funds have dogged Ellison this year and ultimately led to an announcement that he will leave MinRes within 18 months.
MinRes has never been run conventionally. So much so that Taylor admits to sometimes wondering why Ellison took it public at all. Early investors are glad he did though. The shares are up over 30x since IPO.
A lot of this return has been fueled by leftfield bets that others wouldn’t have made. And that, without Ellison’s huge ownership stake, might not have made it past shareholders in a “more normal” situation.
There is potentially some concern that Ellison’s departure and the influx of more conventional management could diminish what Taylor calls MinRes’s “phenomenal ability to pull rabbits out of hats”.
For now, though, Ellison maintains his huge ownership stake and could retain an outsized say in how the company goes about its business.
On the topic of strategy, MinRes’s latest update showed a renewed focus on cutting operating costs and selling assets to raise cash.
The company confirmed that the $1.3 billion partial sale of the toll-road accessing Onslow is now complete and that Hancock Prospecting has agreed to pay $1.1 million for two oil and gas exploration permits and 50% of MinRes’s remaining petroleum assets.
The latter deal brought in more cash than Taylor had expected. And while the proceeds will make a dent in the company’s debt pile, Taylor still thinks that MinRes’s balance sheet looks overstretched at a predicted 4.0x adjusted operating profit.
While the company’s elevated level of debt is relatively new (it has often operated with little or no net debt), its strategy of developing resource operations with the aim of eventually selling down their stake and holding onto the processing rights is not. Can more asset sales be expected, then?
Taylor definitely wouldn’t rule it out. Apart from the higher quality Onslow mine, though, MinRes could find it hard find a buyer for its low-grade, higher cost iron assets. Especially if iron ore prices dip closer to our medium-term forecast of USD 90 per ton.
Our Fair Value estimate for MinRes is $64 per share or almost 70% higher than current share price levels of around $38. Mark Taylor is keen to remind investors, however, that his valuation is accompanied by an Uncertainty rating of High. This means investors should seek a significant margin of safety.
Taylor’s Fair Value estimate is split roughly even between the mining and mining services segments. Over the medium term, he expects that lithium pricing headwinds will abate and that Onslow’s lower cost iron-ore could provide a further boost to the mining segment’s profit margins.
Over the long-term, our assumption is that China’s robust demand for iron-ore moderates as its economy matures and legislators focus more on consumer spending than infrastructure investments. If this is compounded by the supply increases that we expect in coming years, iron ore prices could fall substantially below the levels seen in recent years.
It’s also worth keeping in mind that the lithium market is still in its infancy and that new mines can still move the supply/demand picture quite significantly. Until the market matures in this respect, prices could continue to be volatile and bring large swings in MinRes’s earnings. In Taylor’s view, this makes it all the more crucial to be wary of its highly leveraged balance sheet.