23-November-2023: OK, MinRes (MIN) is certainly one of Australia's best mining services companies, and Gaurav Sodhi went as far as to call them "the best mining business on the ASX" in his 14-Dec-2022 article titled "Lithium: The mania and the cure - part 2" for the Intelligent Investor paysite where Gaurav has been their resources analyst since 2009. As well as resources, Gaurav covers telecommunications and power infrastructure. As Gaurav points out, MinRes' unique business model, far-sighted management and exceptional growth prospects have resulted in fantastic long-term returns.

They are also either the largest or one of the largest mining services businesses in the world, specialising in moving and crushing iron ore, they have billions of dollars worth of earthmoving equipment, fixed plant, trains, trucks and port assets, mostly in Western Australia - where most of the iron ore is.

They are also mine owners and operators, with a number of producing iron ore mines and other mining assets that includes two of the best lithium deposits on the planet - Wodgina and Mt Marion - neither currently in production but they will be soon enough. MIN is a company where a PE ratio is a flawed metric because the Earnings do not include the value of assets that haven't produced any revenue and earnings at all in the past year or two - or during whatever historical period you are looking at. These assets, while not currently producing any earnings, have substantial value and should not be overlooked.

On top of that we have MIN buying into various other Australian lithium companies while the lithium price is down and that's obviously for strategic reasons but part of it seems to be to stop Chinese and other overseas companies getting control of too much Australian lithium and other "critical minerals".

On 22-May-2023 the AFR published an interesting article titled, "What are Australia’s ‘critical minerals’ (and why are they critical)?": https://www.afr.com/companies/mining/the-critical-minerals-boom-is-about-geopolitics-not-geology-20230519-p5d9t7

Excerpt:

The wave of new lithium hydroxide processing plants built in WA is slowly reducing China’s dominance of battery grade lithium, but will amount to only 10 per cent of world lithium hydroxide supply by the end of 2024.

It’s a similar story in cobalt; 63 per cent of world supply is mined in the Democratic Republic of Congo, but it needs to be processed before it is turned into something useful, and China is responsible for 60 per cent of global cobalt refining.

To exacerbate the situation, China also makes about 75 per cent of all lithium-ion batteries and produces about 76 per cent of the world’s silicon metal, a crucial ingredient in solar panels.

As things stand, the world can decarbonise only if China permits it to do so.

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Source: https://www.afr.com/companies/mining/the-critical-minerals-boom-is-about-geopolitics-not-geology-20230519-p5d9t7

I'm not sure how Australia have 53% of global lithium production while China have 56%, but I'm guessing it's to do with the Chinese investments into Australian lithium mines, but in any case I believe Chris Ellison at MinRes and Gina Rinehart (Australia's richest woman, on the back of iron ore mining mostly, plus some other investments) both would like to (a) keep control of the best of our remaining Australian lithium assets right here in Australia, and (b) make some money for themselves in the process.

In Chris's case, he'd be making money for himself and other MinRes shareholders. Gina Rinehart's companies are not listed, they're all private family controlled companies, but we CAN invest in MinRes (MIN) and have exposure to Chris Ellison's vision and shareholder value creation.

In the past year or so, there's been a flurry of buying by MIN of blocking stakes in lithium companies like Wildcat Resources (WC8: 19.9% of WC8 is owned by MIN), 13.56% of Azure Minerals (AZS) where Gina Rinehart also owns 18.3%, and 17.4% of Delta Lithium (DLI) where Gina owns another 7%. It is not clear if there are any plans for Chris and Gina to work together with respect to any of these companies towards a mutually beneficial outcome, but it's interesting to view those companies in the context of what Chris and Gina control together between them.

Additionally, Gina and daughter Bianca Rinehart own 19.99% of Liontown Resources (LTR), another lithium company, and MIN have issued Lithium Australia (LIT) a $4.5m convertible note which LTR have begun drawing down recently. According to LIT's 30-Oct-2023 First-drawdown-from-Mineral-Resource's-convertible-note.PDF announcement, "On successful completion of the pilot plant operations and engineering study, MinRes’ convertible note will convert into equity in a new 50:50 joint venture (“JV”) between MinRes and Lithium Australia, which will wholly own the LieNA® technology going forward. The JV plans to license the LieNA® technology to third-parties at a target headline gross product royalty rate of 8%"

Fingers in many pies, but many of them are clearly lithium-related.

This is all while there have been overseas takeover attempts of some of these companies (LTR, AZS) and the lithium price has fallen quite a bit, AND lithium companies represent 5 of the 20 most shorted stocks on the ASX, including the number one most shorted stock, Pilbara Minerals (PLS), currently 18.5% sold short and rising.

Source: https://www.shortman.com.au/ [with some colourful highlighting on the left side added by me.]

MinRes also own 12.87% of Develop Global (DVP), the new miner/mining services hybrid company (just like MIN only a lot smaller) that is being built up currently by Bill Beament, the former driving force behind Northern Star Resources (NST) for all of those years. There are some analysts who believe that Bill B is the natural successor to Chris Ellison at MIN once Chris decides to step back or retire - both Chris and Bill admire each other's accomplishments with what they have done in business and their entrepreneurial mindsets. For that change at the top of MIN to occur however, it is likely that MIN would have to acquire the rest of DVP with Bill's blessing and for Bill to stay on to run the combined company. No guarantees but that's one possible future outcome, and makes sense in the context of MIN owning 12.87% of DVP, being a blocking stake that stops all other suitors from fully acquiring DVP, unless MIN agrees to sell. That blocking stake may hold DVP's SP back a little but doesn't do MIN's any harm. For clarity, Chris Ellison owns around 4.25% of MinRes shares on issue and Bill Beaument owns 18.5% of DVP shares on issue.

In 2006, Ellison and others established Mineral Resources as a merger of three mining services firms – pipeline contractor PIHA, ore-crushing firm Crushing Services International (CSI), and Process Minerals International (PMI). Ellison was a major shareholder in each of the three. Mineral Resources was floated on the Australian Stock Exchange (ASX) in 2006 at 90 cents per share. By 2022 the company's share price had risen to $71 per share, with Ellison holding around 12 percent of the company. He has since sold down that stake, but still holds 22,471,416 MIN shares, a stake with a current market value (based on MIN's closing SP of $64.72 yesterday) of $1.454 billion. He also owns one of Australia's most expensive homes and has other assets.

The Mosman Park mansion bought for $57.5 million in December 2009, setting an Australian record at the time.

The following is a small excerpt from: https://www.intelligentinvestor.com.au/recommendations/mineral-resources-takes-a-dive/152981 [Gaurav Sodhi, 10-Oct-2023]

The story of Mineral Resources is now legend. After leaving school at the age of 15, Chris Ellison made a fortune as he founded, then sold, a mining services business to Monadelphous in the 1980’s.

Then a troubled firm, Monadelphous went to the wall and Ellison lost everything. The firm was later revived under new management and is now a blue chip stalwart of WA, but Ellison missed all of that. He used his credit card, reportedly maxed to $10,000, to tie up three small services firms to create Mineral Resources.

The firm listed on the ASX in 2006 at 90c per share. It is now a $12bn colossus, the largest third-party crushing business in the world and, until recently, a stock market darling.

Source: Pilbara Minerals

Lithium meets the cycle

Lithium is a notoriously difficult commodity to analyse. There is no spot market. Sales are made by opaque contracts and prices only disclosed after a lag.

Carbonate and hydroxide prices, which are processed lithium products used to make cathode materials for lithium batteries, require specific offtakes and prices are usually contracted and secretive.

Most miners, however, sell a spodumene concentrate, and prices for the concentrate have diverged from processed carbonate and hydroxide. While carbonate prices have fallen by 80% over the past 12 months, spodumene prices have merely halved.

These intricacies are lost when prices are driven by euphoria and fear. 

We have been cautious about lithium. Markets tend to accommodate new demand with new supply in unexpected ways. When the world expected peak oil, shale extraction technologies upended the narrative. When cobalt became hard to access outside Congo, car makers learned how to build without it. Indonesian nickel producers have disrupted nickel supply by learning to process complex laterite ores. We’ve always been skeptical of the higher for longer camp in any commodity because that hasn’t been the path of history.

Lithium, however, is in a unique spot.

Niche gets big

As we have noted in Lithium: the mania and the cure, lithium is moving from a niche commodity to a bulk commodity, a transition that will take time and require oodles of capital. To attract that capital, prices will need to stay above marginal costs for an extended time.

Lithium is out of favour now. Prices rose too far; subsidies in China have played havoc with inventories and new supply is coming. Yet we think there is a good chance that prices remain higher for a while. Only higher prices can incentivise new supply.

Albermarle, one of the world’s largest lithium producers, is valuing spodumene from Liontown, a takeover target, at US$1,600 a tonne. Industry insiders don’t always get it right, but their actions shouldn’t be ignored. Albermarle’s actions suggest new supply, especially low-cost supply, is hard to introduce.

MinRes is currently expanding output from its two hard rock mines (each 50% owned) and should produce about 900,000 tonnes of spodumene concentrate within 3 or 4 years, up from about 300,000 tonnes last year.

Costs are expected to fall to between $500-600 a tonne, which leaves plenty of margin even if prices decline further.

Services and iron ore

MinRes is, of course, more than just lithium. The mining services business at the heart of MinRes has raised volumes by 20% a year for the past decade. We’ve explained why our valuation of the services business, at about $30 a share, sits higher than most in previous reviews.

The iron ore business is undergoing a step-change in quality that will see output double and costs crumble from about $100 a tonne to $40 a tonne. That is being done by building an integrated logistics line to take ore from pit to port.

All the infrastructure to move ore will be owned by MinRes and it could be opened for third party access, or even partial sale, at some point. We don’t think improvement in the iron ore business, or the attached infrastructure, is being counted by the market. Iron ore adds another $10-15 per share to our valuation.

Following its expansion, the lithium business could be worth the entire market capitalisation of the business today. On a sum of parts basis, we think MinRes is worth over $90 a share.

Slow down

The balance sheet remains a risk. Over the next three years, MinRes will spend about $4bn in capital expenditure to grow lithium and iron ore volumes. Net debt has grown to $3.6bn and could climb further.

Yet the founder owns 12% of the business and management have built a track record of conservatism and success. We note that MinRes retains plenty of options of lowering risk such as selling project equity or infrastructure. The balance sheet is a risk, but not an insurmountable one.

Lithium prices also present a risk. Prices could remain weak. We also need to be aware that, like oil, cobalt or nickel, new technologies could change everything. Low costs, however, should protect margins as volume growth adds to cash flow.

It’s uncomfortable to buy when commodity prices are falling but these are the opportunities we must seize. We recommend starting slowly, but it’s time to BUY.

Disclosure: The author owns shares in Mineral Resources, as does the Intelligent Investor Equity Income Fund, Equity Growth Fund, and Ethical Shares Fund.

IMPORTANT: Intelligent Investor is published by InvestSMART Financial Services Pty Limited AFSL 226435 (Licensee). Information is general financial product advice. You should consider your own personal objectives, financial situation and needs before making any investment decision and review the Product Disclosure Statement. InvestSMART Funds Management Limited (RE) is the responsible entity of various managed investment schemes and is a related party of the Licensee. The RE may own, buy or sell the shares suggested in this article simultaneous with, or following the release of this article. Any such transaction could affect the price of the share. All indications of performance returns are historical and cannot be relied upon as an indicator for future performance.

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Note: As I explained earlier, Chris Ellison no longer owns 12% of the business as Gaurav suggests there, but he does still own around $1.5 billion worth (4.25% of MIN).

And Gaurav hasn't mentioned the various stakes that MIN is buying in other lithium miners (that I discussed above) which I think points to a longer term plan to control or at least provide the mining services for a larger group of lithium mines than what MIN currently owns.

MIN are market leaders in Mining Services but not yet in lithium and they are still a higher cost iron ore producer from their own iron ore mines. However, they do have a number of competitive advantages, not least of which is Chris Ellison, and his very entrepreneurial management, but also their off-balance-sheet assets like their P&E (plant and Equipment) graveyards - they will happily clean up old mining and crushing/ore-processing sites from miners who have gone broke, where MIN remove all of the old mining, crushing and loading equipment and plant - and also often do some site rehab - sometimes they are paid to do this and other times they will do it for free for the salvage rights because they store all of the old conveyors and ore crushing hardware etc. and use it to build new crushing plants at either their own mine sites or their clients' mine sites. And all of that used plant and equipment has a book value of $Nil. It probably has little to no value until they use it again, and then it does.

MIN can be sold down on poor iron ore sentiment or on poor lithium sentiment - and also when people are concerned by Chris's M&A moves, but having watched Chris Ellison operate for a number of years, it's an easy decision for me to buy MinRes shares at below $60 or up to $65/share, particularly with that very significant future lithium upside. 

As usual, Chris has a longer term view and he's not content to JUST be a large player in spodumene - he wants that vertical integration and to refine the spodumene to produce battery-grade lithium hydroxide - and so far he's mostly used Albemarle for that, and he's outplayed them at every turn so far, but he's fairly agnostic about where his partners come from as long as he gets a good deal from them. And when he can't get a good deal, he just ploughs on and does it himself.  

Here's a quick case study - just of Wodgina: when Chris Ellison was first developing Wodgina he said he was getting into lithium for a good time, not a long time, and he would likely sell out at a good profit before the peak, and then he sold half of it to Albemarle in late 2018 pretty much at the previous lithium peak, with an agreement that gave MIN half of the Albemarle Lithium Hydroxide (LH) plant that was being constructed at Kemerton (near Bunbury in south west WA) as well, and when that sale (for half of Wodgina) settled - at $US1.15 billion (A$1.58 billion), it looked like Albemarle had overpaid by quite some margin because the lithium price had declined sharply - and then Chris recut that deal a few more times over the next few years (always in MIN's favour), which saw Albemarle further increase their stake in Wodgina - which remained on "care and maintenance" (i.e. not producing anything) since shortly after the first sale announcement at the lithium peak. 

This year Chris announced that MinRes had "simplified" their JV arrangements with Albemarle and that Albemarle would now control all of the Kemerton LH refinery but that MinRes would increase their own stake in Wodgina back up to 50% and would remain the mine operators. This came with a further payment to MinRes by Albemarle of US$380-400 million, including the net consideration for MinRes’ share of Kemerton and completion adjustments at Wodgina and Kemerton. See here:  https://www.mineralresources.com.au/news-media/simplified-marbl-jv-agreement-reached/ [20 July 2023]

And here: https://www.afr.com/companies/mining/ellison-eyes-new-lithium-prize-near-albemarle-joint-venture-20231018-p5ed9f [22-Oct-2023]

He's not silly, that one! Smart cookie, and great to have in your corner. Not so good when you're on the other side of a deal with him or his company, but apparently he's loyal to his friends, employees, clients and partners, and so far longer-term MinRes shareholders have done very well out of investing in his company as well.

https://www.mineralresources.com.au/investor-centre/annual-reporting-suite/

Disclosure: I hold MinRes (MIN) shares in my major real life portfolios (including my SMSF) and have recently added them back into my virtual SM portfolio as well, taking advantage of the lower share price.