@Dangles This makes a lot of sense.

Technical support is only about the SP and absolutely nothing about the fundamentals of supply and demand for the commodity, which drives long term valuations. For Iron Ore, now is the time to put your technical analysis away,

Not only is Simandou coming onstream, but capex is continuing to be poured into low cost resources by Vale in South America, and also in the Pilbara particularly $RIO and $BHP. This has momentum, and prices of $80-$100 won't stop that momentum,

So then we have to look at the mid- and higer-cost players with AISCs of $70-$100/tonne. The problem is, these have marginal operating costs a lot lower, so the price can swing down quite a bit further once structural supply exceeds demand. They'll keep pumping out at $50-80/ton,

There's a real chance that low cost supply push coincides with a couple of years of weak demand.

I for one am not calling the bottom on this any time soon. But perhaps a once-in-a-decade entry opportunity for $BHP and $RIO is coming in the next year or so.

The real craziness is Simandou sits in pristine tropical rainforest and home to Chimpanzees.

Can't believe Rio is repeating the same mistake as the destruction of the Juukan Gorge.

I suppose natural history doesn't matter when profit comes first.

On the lithium side we still need more development put on hold.

Holding off on projects such as DVP Pioneer Dome and Wesfarmers Earl Grey would help. If this happens I'll definitely be a buyer of both. Even if WES is more than $70.

@thunderhead it is a bit of an irony, the key risk is balance sheet and commodity prices. They can't do much about commodity prices apart, from cut costs, which they are doing now. To protect the balance sheet they cut the dividend payment, which I think was a great capital allocation decision and does make the company safer given the debt burden, but investors take it as doom and rush for the exit as they don't get a small percentage return, crazy.

I think Gaurav is probably more operating on a longer timeframe than being a hero knife catcher. If you have confidence that Onslow will come online and iron ore prices wont dramatically decline (seems unlikely but anyone's guess) from here the balance sheet risk will take care of itself. If iron ore does decline by another 20-30% then the future is looking much more painful but I am giving this a low chance probability.

Looking around at all the headlines and the fear around lithium prices, it does feel like we are moving closer to a bottom of the price cycle, where supply starts to get taken out of the market. Even Pilbara minerals is finally starting to sell off a bit, but I think it probably still has further to go before it is cheap. Unlike MIN which given the other components of the business it can tread water and wait for the lithium price to bottom. Although I am reminded of the old saying 'Man who pick bottom, have smelly finger'!

My earlier investment in Min in the $50's, is looking like particularly poor timing, but its even harder not to see good value now when the SP is at $35. It's probably going lower from here as momentum is very much against it, but I still back them to make it through the cycle. I'm still planning on investing through this cycle, but am also not expecting to need or get this money back for 3-5 years.

Don’t get me wrong, I’m long too from higher levels and am philosophically aligned with Gaurav, but I know from bitter experience how fraught catching a rapidly falling knife is. Gaurav will too from his multiple recommendations of MFG before it all went pear-shaped :)

I think this is the FMG moment for MIN. The time when everyone thought FMG was going to go bankrupt years ago.

This sell off just looks overdone but guess it was a market favourite.

I agree. There are echoes of FMG here - hopefully the result on the other side is just as glorious!

Re: iron ore, I would hope not, but the economic malaise that the elephant in the room, China, appears to be in could well result in another leg down in prices. That will be painful, and the market seems to be discounting that at the moment.

Iron ore is definitely a major risk. I got comfortable with MIN due to the services business but that would be impacted too.

Nice history here - Iron Ore – biggest driver of ASX market returns, profits & dividends – where are we now? - Owen Analytics

There is also a fair bit of execution risk, I'm looking for the announcement in the end of October that the haul road is complete and operating. Any delays in this will really amplify the pressure on the business, all commentary though sounds like this will happen. They then get the proceeds from the sale and the debt burden starts to turn.

@Mujo that is a good iron ore price graph, but just highlights how you have no control over this risk so just have to have management of the cost base. I never liked MIN prior to Onslow as while I thought the mining services business was great the iron ore assets were just too high cost. Onslow for me changes all of this dynamic. But they still need to prove it operationally.

Mineral Resources looks like good buying for a long term investment. However, it looks like the shorters are out to push it a lot lower yet. There’s not much good news in site for the business and they are having a field day!

Agree not looking good when you think about the scenario of commodity prices staying at this level and the debt. I think I fell into the trap of valuing the services business only. I had to reduce my holdings yesterday but will add back in at some point. Will be paying more attention to lithium supply too.

To be fair, free cash flow generated by the services business exceeds interest requirements; and from memory no interest payments are due for a couple of years. My impression/thesis is that capital raise won't be required to keep the lights on, and that the shorters can keep on making it cheaper for me to buy in if they wish. I'm projecting 40-50% upside over 24mo. significant risks are soft commodities demand due to economic squibs in US/China, and Lithium miners persisting with supply expansion in the expectation of medium-term price restoration (which assumes supply contractions) - i'm looking at you, PLS!

Agree with your analysis. MIN can break even on iron ore down to about $74/tonne, which gives us the 20-30% margin you project... could go lower, but I also rate that low probability. Main reason is that China is an extremely savvy customer - even if demand for steel remained low, I wouldn't be surprised to see China investing in a national stockpile at such low prices, providing a price floor. We will be able to prove that if iron imports continue to rise while steel production is flat/falls. The main reason that I hold MIN rather than other lithium miners is that the iron ore game + services business is a steady buffer, while retaining exposure to the long term lithium industry. MIN has a pretty good chance of staying afloat without a capital raise while waiting for the lithium cycle to rebound - not so certain about other lithium pure plays.

Buying MIN over the next few months is averaging down into an excellent business at a cyclical low, not averaging down into a poor business on structural decline. (Unless someone figures out how to make sodium batteries or carbon-capture work, in which case nobody will want exploding lithium batteries anymore - and then we're cooked)

Yes @Rick - I can see today that 4 days ago (because there's a 4 day data lag on Shortman.com.au) MIN was Australia's 13th most shorted stock, and rising. FMG were also starting to rise, but still only just above 1% shorted and MIN have now moved above 8% shorted - so it's not just about iron ore, it's also about MinRes specifically and their debt levels alongside falling iron ore prices and lithium prices remaining so low.

Today's 52-week (12-month) new low share price list was interesting IMO:

Table source: https://marcustoday.com.au/

A couple of banks heading up the "new highs" list on the left and the 12-month low list on the right features plenty of iron ore and lithium companies: FMG, PLS, MIN, CIA, DRR and even the VanEck Vectors Australian Resources ETF (MVR). There is also Stanmore (Coal) and MAC (copper), and energy had a rough day also with Ampol, APA, BPT & KAR all making new 12-month lows, and Woodside (WDS) down -6.8%, or down $1.83 to close at $25 (exactly twenty five bucks per share), after tagging a day-low of $24.97, which is just a bee's whisker above their year-low of $24.93 made 4 weeks' ago, on August 8th.

Santos (STO) closed at $7.02, a level they haven't been down to since Feb 28th this year, and they've been up to $8.18 between then and now.

Woodside Energy (WDS), Australia's largest gas and oil company, were trading at over $38/share a year ago (on September 15th 2023) and they're almost -35% lower now at $25. Energy is doing it tough it seems. Like Lithium, And now iron ore as well.

Good thing our banks are firing or our index would really be down the sewer pipe!

BTW, if you're wondering why RXM - Rex Minerals made a new 12-month high today (on the left side of that table above) - it's because they are under a recommended takeover offer from MACH Group (a private company) priced at 47 cps in cash, and RXM made a new year high of 46.5 cps today before closing at 46 cps, because it looks like they are going to be acquired soonish for 47 cps. Rex own the Hillside Copper project on the Yorke Peninsula in SA which has copper and gold, but no antimony, so not to be confused with the Hillside Gold/Antimony project in NSW owned by Larvotto Resources (LRV) - see here: https://www.smh.com.au/business/companies/visible-gold-glitters-in-first-larvotto-drilling-at-hillside-20240318-p5fdbf.html - LRV closed at 12.5 cps on August 15th, i.e. 3 weeks ago, and they closed at 36 cps today (and 39 cps yesterday, being 3x what they were 3 weeks ago) - because of that antimony - see here: INVESTOR PRESENTATION August 2024 (15-Aug-2024) and here: Larvotto-Resources-Limited-Price---Volume-Movement.PDF (19-Aug-2024) - there's Antimony in them there hills!

(The NSW ones, not the smallish hills on SA's Yorke Peninsula)

Infratil (IFT) is making new 12-month highs again (including one today), and that's one I used to hold both here and IRL. I don't currently hold ANY of the companies mentioned in that table or below it in my commentary.

I do hold Cooper Energy (COE) (in real-money portfolios x2 but not here) for south-east coast gas exposure and they closed flat today at 18.5 cps, well above their year low of 9 cps, but also a fair way below their year high of 24 cps in June - I'll ride that one out. That was a short-term trade (in June this year) that seems to be morphing into a longer-than-expected "investment". They have some warts (debt and rehab liabilities, however much of that is now behind them) but they're worth at least 25 cps IMO either as a standalone company or as an acquisition by a larger player for that access to east coast gas.

Interesting week!

@Strawman Can we get Gourav on for another chat? Love his work and always very interesting to get his views on markets

I am struggling to see how Iron Ore doesn’t go significantly lower. Building in China has dried up and every second country is adopting a protectionist attitude towards Chinese steel. So no domestic steel demand and now it’s looking like falling international demand.

However, as we have seen with previous downturns, Australian Iron Ore producers are excellent at driving down their costs in tough times. I would not be surprised to see Min Resources significantly reducing their Iron Ore production costs, thereby enabling them to continue to make significant returns in a falling price market.

The gist of your suggestions there make sense to me @NewbieHK however it's worth noting that the super-low costs of FMG, and BHP/RIO is because of massive investment in infrastructure - including rail - and very large mines that provide enormous economies of scale. MinRes on the other hand do have rail to some of their sites, but they have iron ore mines scattered around WA and many of those have no rail to them, so that is why they built the haul road to Onslow to truck ore to port, a much more expensive option in terms on ongoing transportation costs for their iron ore, but a lot cheaper up-front spend than constructing a rail line over the same distance and then scaling up MinRes' investment in rolling stock and loco's. People have been comparing MinRes now to FMG back when they were even more leveraged (debt to their eyeballs) but they were building rail, and that has paid off for them in spades since then.

The other important factor is that FMG were building that rail infrastructure when China were just gearing up and increasing their iron ore consumption - and now we face the opposite scenario where China are reducing steel production so they now need less coal and iron ore to produce that steel.

Twiggy got the timing perfect. Many thought Fortescue would go broke - but now they're an ASX 20 company. Chris Ellison at MinRes usually does get his timing very right, but not in this case with his recent lithium purchases (all the shares in other lithium companies at higher levels than where they are today, apart from PLS which Chris made a motsa on but that was back in September 2021 with PLS shares he bought in 2016) and the iron ore infrastructure in terms of the Onslow project at a time when China is reducing their steel production. We had a GFC and China built infrastructure and cities they didn't even need, and still don't in some cases - but that scenario is not going to repeat - not in China anyway and India doesn't have that sort of money or political willpower or control throughout the whole country like the Central Government of China did (and still does) - so that scenario ain't happening again. We will get growth in iron ore demand from outside of China, but it will be slow and measured, and not the same as it was, not at all.

Compared to what Twiggy did at FMG back in the day, Chris Ellison at MinRes is doing things on the cheap - even though they've been spending billions of dollars. When they build crushing plants they use a lot of second hand parts from their parts "graveyard" and are able to repurpose a lot of old gear that other people don't have access to. This includes conveyors, chutes, grates, crushers, etc. They've gone with a haul road instead of a rail line to Onslow - much cheaper - but running costs to get ore to port will be significantly higher than the 3 big Aussie iron miners who all use rail. Chris Ellison has gone with Transhippers to transport MinRes' iron ore to Capesize vessels anchored 40kms offshore from the Port of Ashburton - which is located about 12 kilometres west of the town of Onslow and 131 nautical miles west south west of the Port of Dampier in Western Australia's Pilbara region. The majors use deepwater ports where the big ships can come in and be loaded directly.

So, yes, MinRes will continue to drive down costs, but they have some disadvantages over the majors that are mainly around where a number of their iron ore mines are located in relation to the available deepwater ports - or any ports really that are big enough for MinRes' Transhippers to dock at - plus the fact that their mines are more geographically diverse and a lot smaller than those iron ore mines run by FMG, BHP and Rio - so they have more mines, but smaller mines and more spread out, with less access to transport infrastructure at some of them - other than by using trucks.

Trucks can work - but they work better in a higher iron ore price environment - especially when their Onslow haul road is 150 km long - from Ken's Bore (mine site) to the Port of Ashburton - and iron ore is a BULK commodity that isn't priced by the ounce or by the Kg, it's priced by the ton, and it's dropped below US$93/DMT (dry metric ton) now.

Data sourced from: https://tradingeconomics.com/commodity/iron-ore this evening.

So - if I was going to take a position in iron ore based on an eventual higher price from here, I would rather do it with a lower cost producer than MIN.

Gold is where I'm at anyway at this point, and copper is looking interesting, but not interesting enough yet. I'm steering clear of lithium and iron ore because I keep hearing people call the low, and then they go lower still, so I don't know how low they will go, but I do know that MinRes won't be the last man standing if they keep dropping, that would be FMG. And BHP and RIO too who have higher costs than FMG but are still way lower than MinRes and are also diversified across commodities where FMG are not, which is why FMG NEED to be the lowest cost iron ore producer of the majors. But I'm not in FMG either, and not just because of the iron ore, but that's a whole different story.

It's not all doom and gloom, at some point you may be able to buy MinRes (MIN) for the cost of their Mining Services business, which is one of the best in the world, and get their iron ore and lithium assets and infrastructure for nothing. Some people will tell you that we're there already, but I'm not sure if I'd pay $30 to $35/share for MinRes' mining services business alone. Would be interesting to hear Gaurav Sodhi's view on that.

The problem with that scenario however is that despite Chris Ellison saying on their most recent analyst call that the asset sales are done, they're not selling anything else... If iron ore keeps heading south, MinRes still need to pay the interest on their debt, and also of course reduce their debt, so asset sales might become something they do reluctantly, and the only assets they have that are probably going to fetch "fair" prices would be some of their mining services assets or a stake in that division of MinRes to another company, and that, IMO, devalues the company. That's the trouble with asset sales - you don't always get to buy them back later at a lower price. Anything related to iron ore and/or lithium in terms of MinRes' assets are going to fetch next to nothing because of where we're at in the cycle - so it's the WRONG time to be selling those assets - Chris would probably like to be BUYING more assets at current prices to be honest, but, alas, he can't, because he's already leveraged about as much as his lenders will allow.

And a Capital Raise at these levels. Forgedaboudit!!

Imagine how low their SP would go if they announced a CR!

So, MinRes will likely keep on trucking. Literally. And hope the cycle has bottomed and everything will be fine. Coupla months!

But if they're wrong... And this isn't the bottom... Well, they aren't going broke - they still have that Mining Services Business - and it's a big one - but if iron ore goes lower from here and lithium stays low, things do get tougher for MinRes, for sure. Not going-broke tough, just no-more-dividends and reduce-all-discretionary-spending tough. Which will be tough on their share price too. Tougher than it is today I suspect.

So yeah, I like the business, but I don't want direct exposure to the company at this point. There will be a time for me to jump back onboard but that time is not now.

Great post @Bear77, with lots of good insights.

As for Gaurav, he does think we're there i.e. we're getting the rest of the business for next to nothing at these prices.

BHP stated in their results they expect about 150Mt of global iron ore production is loss making at US$90-100 a tonne hence why they think it’ll mostly be range traded. Imagine if it falls below that then more would be losing money quite quickly. I can’t find much on the way of recent data but looks about a bit over 2000Mt is consumed annually - would like to see some recent data though.

Still see there’s massive infra projects going around globally and a lot of places have residential shortages and have big housing projects coming down the line (albeit not sure how much steel a house uses but that’s what China was doing anyway i guess).

Sentiment is negative though so could fall further. Interested to see with all these tariffs on chinese steel where europe/US and Canada get their steel - or iron ore if domestically produced. Whether they go to south korea/japan which would get iron ore from aus or somewhere else.

I think i’d expect it to fall out of the range at the lower side at some point but if the biggest player think that’s the zone (albeit they’re conflicted) must give some weights to it i guess.

Id expect MiN to stay profitable at oslow which would mean $1B in EBITDA from mining services alone - iron ore and lithium look like free options at the moment - the oil/gas is a wild card. Lithium also looks like at an unsustainable lo level.

At at $10B EV MIN looks like the mining service business some prob justify the current price (albeit not overly cheap). Yes they have issued no covenant, high yield debt and nothing due for a couple of years. They’ll have the road sale cash soon too.

Lots of parts that are all working against MIN - just need one to swing the other way.

Oil and gas prices are falling as well. At some point this will favour the diesel hungry producers.

But MIN also has those gas assets too. So that could be a headwind.

Meanwhile I am still thinking of another way to play the cheap oil theme other than gold and Qantas

Definitely @Alpha18 -- just trying to finalise a time with Gourav now and we'll let you know when we lock something in.

On the latest Intelligent Investor Stock Take Podcast (which is outside the paywall) there's a good discussion where Gaurav explains his thoughts on Min Res

Stock Take: MinRes Drops, Rightmove Pops

You can also listen to the episode on Apple Podcasts and Spotify and it should be available on their Youtube Channel soon too

Ah, he’s back on the Pod after a few weeks. Look forward to hearing it.

Yes - I was thinking the same thing (was missing Gaurav ... and was concerned :)) - he was holidaying in London apparently

I wasn't - understandable if he needed a well-deserved break. Gotta spend those super profits from calling the bottom on coal stocks somehow! :D

The other aspect of the Onslow mine that I find interesting is in terms of its place in the global market and its suitability to blend with higher percentage ore for steel making. I’ve heard this mentioned a few times in passing on calls by CE. I haven’t been able to independently confirm this, but the logic makes sense.

Onslow has 58% iron ore content so it currently gets a discount relative to the 62% benchmark ore that the other majors produce. This discount varies depending on how much demand there is for total ore. The interesting bit to me is how the 58% Onslow ore fits in with the ore that will come from Simandou, which is 65% ore. Given that the Baowu Steel Group is a part owner of both the Onslow and Simandou mine, they have secured a complementary supply from the two mines to create an ideal blend for their furnaces. They want 62-63% for environmentally friendly steel making, but I’m sure there is a lot of nuance around the blending. I’m not sure how important this is but it’s worth noting when downstream customers take ownership and secure there supply chains.

This doesn’t negate the effect of low iron ore prices on MINs cashflow, but I can see scenarios where having this partnership does insulate Onslow somewhat, relative to being purely exposed to the spot and subsequent quality discounts.