Technically speaking, shares retreating back to the doghouse after a powerful run from the yearly lows to the mid 50s.

• Back below the 50DMA
• Below the 200DMA (did not touch this level even on the strong rally prior)
• Sell volume increasing on the recent slide
• RSI back into bearish terriority though not yet oversold
• MACD/PPO crossing negatively

Shares need to make a higher low and chart a path to higher highs from here to repair the damage.

Announcement in response to the news about CEO Chris Ellison's tax affairs:

Statement in response to recent media reports

The Board of Mineral Resources Limited (ASX: MIN) (MinRes or Company) wishes to comment on issues raised in recent media reports relating to Managing Director Chris Ellison.

The Board is committed to robust and transparent corporate governance. It has engaged external legal counsel to conduct an investigation into this matter and advise the Board. Mr Ellison has cooperated with the investigation and the investigation is well-advanced.

Since its IPO in 2006, payments made by MinRes to offshore entities connected with Mr Ellison related to pre- IPO sales contracts that were recognised as liabilities in the Company’s financial statements at the time.

As to his private tax matters, Mr Ellison self-reported to the Australian Taxation Office, repaid amounts owed and disclosed these matters to the Board. While this does not diminish what happened, Mr Ellison profoundly regrets his errors of judgment.

The Board today comprises directors who individually and collectively have a strong focus on governance and are committed to continuous review and improvement.

The Board has full confidence in Mr Ellison and his leadership of the MinRes executive team.

The Board will issue a further statement regarding this matter once its enquiries are completed.

------------------------ END ------------------------

The board is investigating, it's actually already well advanced, and we have full confidence in the CEO. So it sounds like the outcome of any investigation is a foregone conclusion at this stage unless something else crops up (further revelations, probably. External pressure, maybe - but I'm not sure there's anyone with a big enough holding to do that, and any serious shareholders are probably investing in the existing management as much as the company itself).

The revelations are disappointing. The bullish view is these matters are in the past, seem to have been resolved, and a charitable view could be that Ellison is a rule breaker who went a bit far and learnt his lesson.

On the other hand, a rule breaker still needs to respect the law. Wary of further information to come out - these sort of things are rarely isolated incidents. It also points to just poor judgement in general, focused on the short term. Not what I want to see.

Held, but considering where to go from here.

There were already some red flags, but understanding the article below has confirmed a lot.

You want 'honest and competent' management and I think this highlights Chris is definetly not honest.

I'm not sure how I feel about it re MinRes as a shareholder. I see the opportunity for MinRes given the set up, and Chris is key to the story, but there are also some serious red flags.

Chris Ellison’s offshore secret

An investigation by AFR Weekend has uncovered how Mineral Resources chief executive Chris Ellison, one of Australia’s richest men, allegedly evaded tax for years.

It was August 2007 and Chris Ellison received bad news in the mail. A year after he floated his iron ore and lithium company, Mineral Resources, the Australian Tax Office wrote to say it wanted to discuss his personal tax returns spanning “a number of years”.

It was terrible timing for the blunt-speaking New Zealander who has become one of Australia’s richest people on the back of the resources boom.

Coincidentally, Ellison was preparing to reshuffle his offshore business holdings. He decided not to tell the Tax Office about the scheme, which allegedly enabled him and four other MinRes executives to earn secret income while avoiding paying millions of dollars in Australian taxes. The scheme also meant MinRes shareholders missed out on millions in profits.

Twelve years later this omission would come back to haunt him. Fearing the scheme was about to catch up with him, he asked his lawyers to cut a deal with the ATO. He offered to share his secrets with the ATO, pay back any tax owing plus a multimillion dollar fine to avoid serious penalties.

Chris Ellison has cultivated an image as a straight-talking man of action. 

The deal he proposed to the ATO contained an important condition: the tax office would never reveal its existence or its investigation to anyone including the Australian Federal Police or the Australian Securities and Investments Commission.

In a document obtained by AFR Weekend, the tax commissioner concluded this year one of the executives involved in the scheme exhibited “behaviour that amounted to evasion for the income years ending 30 June 2004, 30 June 2007, 30 June 2008 and 30 June 2009”.

Ellison has cultivated an image as a straight-talking man of action who has gone where others wouldn’t to build a multi-billion-dollar mining company based in Western Australia.

But an investigation by AFR Weekend demonstrates the scheme raises tough questions for Ellison. It also raises questions about the readiness of the Tax Office – itself under scrutiny over its settlement with beleaguered accounting giant PwC – to cut generous deals with powerful players rather than expose questionable conduct.

In response to questions from AFR Weekend, MinRes chairman James McClements said: “The MinRes Board acts in the best interests of shareholders and has full confidence in the company’s executive team.

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“The Board takes seriously allegations regarding corporate governance practices and, where appropriate, investigates allegations with the assistance of external legal advisors.”

Building a fortune

A self-made billionaire, Chris Ellison boasts a brilliant career track that was recognised in 2022 with an investiture as a member of the New Zealand Order of Merit for his services to New Zealand-Australia relations.

Ellison built Mineral Resources out of three startup companies he launched in the 1990s, listed it as a $108 million company in 2006, then grew it to a business valued at $9 billion today thanks to ambitious iron ore and lithium plays.

He grew up in Dunedin in New Zealand’s South Island, leaving school the day he turned 15 and working on a farm, then a cattle station.

As Ellison tells it, when he came to Australia in 1977 aged 19, he and his brother would tell prospective employers they could do anything. Which meant, he explained on a MinRes video: “Well, we can ride pretty good, we can drive anything.”

Getting a crane driver ticket in Darwin set Ellison on his way. He moved to Port Hedland and in 1978, aged 21, started his first company, providing cranes for worksites, just as work on the North West Shelf exploded. “I was making $550,000 a month that I was banking as profit,” he says on the MinRes video.

Ellison sold out in 1982, aged 25, and went on to start a series of other businesses. In July 1992, “I decided I wanted to start another private company, so I started up MinRes,” he said on the 2023 corporate video. “I had $10,600 in the bank … but I had a credit card that had a $50,000 limit on it. I used all of that credit that I had to its absolute maximum. And I learned to appreciate it.”

That credit evolved into three businesses. First in 1993 was PIHA Pty Ltd, with former pipeline mechanic Bob Gavranich. PIHA built pipelines and site infrastructure for mining projects.

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In 1995 Ellison founded Crushing Services International, which provided contract crushing for miners. And in 2003 he started the Process Minerals International business, after buying rights to low-grade “reject” manganese ores mined from the Woodie Woodie tenements in north-west Australia.

These three businesses – PIHA, CSI and PMI – would merge to form Mineral Resources for its float in July 2006.

Ellison worked with a tight group of senior executives who had shares in the three businesses. They went on to buy property together in joint holdings, which was then leased by the businesses that became MinRes.

But according to ATO documents, Ellison offered other remuneration to this close-knit group as well. It was offshore, and access was on a need to know basis.

The extraordinary events that followed can only be told because in 2021 and 2022 Ellison’s tax advisors provided extensive records to the ATO in their attempt to strike a deal. The Tax Office used these documents to produce a detailed summary of how the offshore remuneration scheme worked.

Mineral Resources CEO Chris Ellison in his early years. 

Going offshore

In the 1990s RSM Bird Cameron in Perth was the auditor for CSI, PMI and PIHA. But it was another member of the global RSM network, RSM Nelson Wheeler, in Hong Kong, that introduced Ellison to the offshore world.

Nelson Wheeler’s corporate secretarial business traded as Asialink Services (HK) Ltd. Asialink set up a series of companies for Ellison and other MinRes executives domiciled In the British Virgin Islands, with nominee directors and shareholders. The British Virgin Islands are a tropical archipelago east of Puerto Rico in the Caribbean, with turquoise waters, palm-fringed beaches and a history of pirates. But the territory is better known for the zero tax rate it applies to companies domiciled there.

The ATO documents lay out an elaborate corporate structure that was constructed in the early 2000s. It enabled Ellison and his senior executives to move money into accounts held by the BVI companies, thereby avoiding paying Australian taxes, and to use credit cards to spend it.

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At first, when MinRes was still a private group, the big loser in this secret arrangement was the Australian tax man. But after MinRes floated in July 2006, the BVI profits were not only untaxed, they were paid from shareholder funds without being disclosed to MinRes directors.

ATO documents show the first two British Virgin Island companies, International Mining Supplier Limited (IMSL) and International Equipment Rentals, were operating by 2000.

The ATO documents don’t detail the activities of these two companies, but both had bank accounts in Hong Kong, and both held hundreds of thousands of dollars for Ellison, according to handwritten notes seen by AFR Weekend.

According to an ATO position paper produced this year, on May 27, 2003, Nelson Wheeler set up a third British Virgin Islands company called Far East Equipment Holdings Limited (FEEHL). And it’s this company which became the focus of a years-long ATO investigation.

FEEHL was owned by a nominee company on behalf of a trust set up for the five MinRes executives including Chris Ellison. Ellison took 51 per cent of the FEEHL earnings, while the other four executives held shares ranging from 5 per cent up to 21 per cent.

Just six weeks after FEEHL was set up, Crushing Services International (one of the original three Ellison companies that later formed MinRes) transferred $150,000 to the company on July 2, 2003.

FEEHL immediately sent $139,000 of this to one of the other BVI companies, IMSL, which in turn passed $5000 to the third BVI company, International Equipment Rentals.

IMSL had set up a string of Visa Gold credit cards. One of the cards went to Ellison, and two monthly statements obtained by AFR Weekend show how widely he used it.

His Visa billing statement for October 2003 shows he spent $7900 on shoes, curtains and paying $6866 in school fees at All Saints College Bull Creek, one of Perth’s top schools.

In February 2006 he spent $18,800, pulling the card out at Bunnings, flower shops and restaurants, spending $10,500 with Rosendorff’s Diamonds, and booking a $4800 New Zealand skiing vacation.

None of this could be traced back to Ellison as taxable income.

But the money funnelling into these companies was being used for more than just Ellison’s personal expenses.

Back in 2003, Crushing Services sent FEEHL a further $500,000 in August, then $400,000 more in September.

Chris Ellison as a teenager on a New Zealand cattle station.  

At the time, Crushing Services (CSI) was regularly buying used mining equipment, sometimes for its own operations, sometimes to resell to other miners.

CSI bought Svedala scalping screens and belt feeders from the closed Mount Todd Gold Mine in the Northern Territory. There was a ball mill and small batching plant from St Barbara Mines, and five gyratory crushers from Mount Leyshon gold mine.

But when the paperwork went through – and without the knowledge of some of those who handled the deal – it turned out it was FEEHL that had bought the machinery, using CSI funds, so it was FEEHL that earned the profit from the resale.

More frequently FEEHL sold the equipment to one of the MinRes companies for as much as five or 10 times the original cost.

The Tax Office has concluded that FEEHL cleared $1.69 million profit in the 2004 financial year. But this does not seem to include almost $1 million which the ATO says was transferred to International Mining Supplier, which funded Ellison’s Visa Gold credit card, and $1.5 million which was transferred to an Australian trustee company that Ellison controlled, World Wide Infrastructure.

FEEHL’s activities slowed down in the two years leading up to the August 2006 float, when the newly merged MinRes group faced heightened governance and accounting scrutiny. The Tax Office concluded that FEEHL actually lost $1.3 million in fiscal 2005 and another $190,000 the next year.

But according to the ATO documents, soon after MinRes floated on July 28, 2006, FEEHL returned to making money for Ellison and his close-knit group of executives, at the expense of MinRes, the new public company.

The ATO position paper states that on August 30, 2006, just a month after the float, MinRes subsidiary Crushing Services paid $1.895 million to FEEHL, marked as “first payment for purchase of plant and equipment Ref 4704”.

Any such transfer involved the publicly listed company’s money. The ATO says it was an undeclared related-party transaction, a secret transfer arrangement that delivered huge untaxed profits to Ellison and the four execs, at the expense of MinRes shareholders.

MinRes was using the inflated prices it paid to FEEHL for machinery to claim depreciation at elevated levels. This was also at the expense of taxpayers.

FEEHL earned $1.8 million profit in the MinRes group’s first year as a public company, the ATO says. Six weeks later, in August 2007, the Tax Office knocked on Ellison’s door.

The auditors knew nothing of Ellison’s offshore activities. They were more concerned with apparent discrepancies in the multiple trusts and holding companies which held Ellison’s assets in Australia.

Ellison had other problems. The offshore accounts were now run by Singapore-based Boardroom Corporate Services, which bought Nelson Wheeler’s corporate secretarial arm Asialink Holdings (HK) in 2005.

On October 11, 2007, a MinRes executive instructed Boardroom “to close all the credit card accounts” in International Mining Supplier Ltd (the other BVI company, International Equipment Rentals Ltd, would be deregistered in May 2008).

That same day email correspondence shows Ellison asked Boardroom to set up a new sub-account for him at Standard Chartered Bank: “From time to time I will provide you with fund transfer instructions together with the relevant supporting documents.”

Ellison’s new sub-account would be held in the Asialink Holdings account at Standard Chartered.

Chris Ellison after the Mineral Resources AGM last year.  

Ellison added a Letter of Wishes, which instructed Boardroom that in the event of his death the funds should be transferred to his then-wife, Debbie Ellison, and if she pre-deceased him, to his children.

Within a week similar sub-accounts had been set up by Asialink Holdings’ account for each of the other executives as well, with new credit cards. In December 2007, $2 million was transferred into these sub-accounts from FEEHL, of which $1.09 million went to Ellison’s sub-account, the ATO says.

But the Tax Office wasn’t going away. In early January 2008 they requested a meeting with Ellison. He agreed to meet them on Friday, January 18, in the Perth offices of accountancy firm RSM Bird Cameron.

Bird Cameron was in an awkward position: it was the auditor for Mineral Resources, while it was providing personal tax services to the CEO, Ellison.

The tax officers had a long list of queries for Ellison: trust records showing the wrong trustees, asset revaluations, loans to associates, and discrepancies in the reporting of transactions.

Business as usual

None of this attention from the tax man appeared to affect Ellison’s activities offshore.

Just three days after the meeting with the ATO, a statement of receipts for FEEHL dated January 21, 2008, showed: “’Funds received from Mineral Resources Limited for final payment for purchase of plant and equipment (ref. 4704) in the amount of $1,895,303.71.”

Almost all of it went straight to Ellison and the four executives. On January 30, 2008, Ellison instructed Boardroom to distribute $1.88 million in the FEEHL account to the five men. Ellison’s share was $958,800. The money was in their Standard Chartered accounts in Hong Kong by the next day.

There were further cash transfers to the five men, according to the ATO.

In August 2008, with new anti-money-laundering laws coming in, Boardroom notified the MinRes executives that they were no longer willing to house the five sub-accounts.

“Under advice from Boardroom Corporate Services the individual accounts had to be closed,” one of the executives advised the others in a handwritten note seen by AFR Weekend. “All the monies have been transferred back to FEEHL. Individual accounts have now been set up within FEEHL (see attached for details of your account).

“Authority is given that any individual can operate on his own individual account without the approval or reference to anyone (see attached – I leave it to you should you wish to set up a password).”

FEEHL closed its own account at Standard Chartered and opened a new one. Boardroom would administer “child accounts” for each of the new five executives within the new account. And everything was back to normal.

Meanwhile, the ATO completed its audit of Ellison’s personal tax affairs, finding he owed a modest amount of money – some say it was as low as $20,000. He told colleagues he counted this as a victory.

The ATO position paper does not detail any records for FEEHL after 2009. The company was deregistered in 2014.

But according to the ATO’s calculations, based on documents provided by Ellison, in MinRes’s first three years as a public company it made regular payments to FEEHL from which the British Virgin Islands company earned $6.6 million in profits. These profits were split between the five executives. Ellison’s share was $3.38 million.

This does not include multiple transfers from FEEHL to International Mining Suppliers, and to World Wide Infrastructure in Australia.

The Tax Office documents refer to a total of $13 million in undeclared income associated with the British Virgin Islands scheme, which appears to include MinRes’s claims for depreciation on the inflated purchase prices.

Staying ahead of the game

None of this might have come to light, but in December 2019 Mineral Resources executives began to worry that details of the British Virgin Islands companies might be exposed.

Ellison turned to well-known Sydney tax accountant Christopher Batten.

Correspondence shows that on December 16, 2019, Batten met with a director of integrated compliance at the ATO and two other tax officers to discuss a voluntary disclosure by five taxpayers OF undisclosed offshore income. Under Australian law, voluntary disclosures of undeclared income qualify for an 80 per cent reduction in any penalties that apply.

A month later Batten nudged the tax officer: “I hereby request a letter outlining the Commissioner’s agreement not to refer a disclosure that my clients intend to make to law enforcement agencies as well as other Federal Government agencies,” he wrote on January 14, 2020.

“The agencies are to include but not limited to the Australian Securities and Investment Commission, the Australian Federal Police and the office of the Director of Public Prosecutions.”

On February 4 the ATO wrote back to Batten: “The Commissioner will agree not to refer the disclosure to other Government agencies subject to the following conditions …”

These included the absence of any current criminal investigation, and that the five executives would disclose “approximately $10 million in income from Hong Kong previously not disclosed by five individuals resulting from transfer pricing concerning mining equipment; the excess depreciation claims of companies in relation to the mining equipment acquired from Hong Kong; [and] a finding of evasion resulting in amended notices of assessment for the years 2005-200? [sic]”

There was a lot at stake. ATO documents suggest that without the disclosure discount, a 75 per cent penalty could be applied to the unpaid tax.

Based on initial estimates that the undeclared income totalled $7.5 million, the nightmare scenario was that Ellison and the other executives could have faced a tax bill of up to $17 million. This would include tax and penalties, but the biggest cost would be the interest accrued over a decade.

If the deal was agreed, however, the base penalty would be 80 per cent lower. This saving, which would also lead to lower interest costs, would cut up to $5.8 million from the total tax bill owed.

But as Ellison’s advisors gathered more documents and records, estimates of the undeclared income jumped from $7.5 million to $10 million, then to $13 million, which would have produced even higher tax, penalty and interest payments.

On February 24, 2020, Batten was asking again: “Are we any closer? I have some anxious taxpayers.”

It wasn’t until May 2021 that Ellison’s advisors delivered the first tranche of documents to the Tax Office, the clearest signal that a deal with the ATO had been struck. More documents followed in September, then January 2022.

AFR Weekend has been unable to independently confirm if the deal was actually agreed. Neither the ATO nor Ellison would comment.

The documents provided by Ellison are the basis for a 98-page summary paper prepared by the Tax Office this year, which provides granular detail of the FEEHL transactions, and highlights Ellison’s role in orchestrating the scheme. His name appears 53 times in the document.

The explosion in the MinRes share price since 2006 has created share market windfalls worth tens and for some hundreds of millions of dollars for the five executives.

In comparison, the proceeds from the British Virgin Islands scheme are small beer. It begs the question why men who were wealthy even back then would engage in something so risky.

For Chris Ellison, public scrutiny is part of running a listed company. Last month he shrugged off concerns raised by governance group Ownership Matters over an estimated $10 million earned by his daughter’s shipping agency, which MinRes requests shipowners use when carrying its ores.

“We’re a public company, we’re open to scrutiny . . . and I need to be held to account, there’s no doubt about that,” he told The West Australian.

Nice rebound - still iron ore and lithium in for tough few years from the latest resources quarterly - resource_and_energy_quarterly_september_2024.pdf (industry.gov.au)

This absolute ball-tearer of a week has obliterated the steep downtrend that formed in the months preceding it.

It is hard to be bearish on technical grounds now (save for a healthy pullback or consolidation near-term), and with the fundamentals set to improve over the next couple of years, the set up still looks good for accumulation for those with a long-term view.

• Release Date: 10/09/24 18:19

MINERAL RESOURCES LIMITED (ASX:MIN) - Ann: FIRB Approval and Business Update, page-1 - HotCopper | ASX Share Prices, Stock Market & Share Trading Forum

FIRB approval received for $1.3 billion minority stake sale in Onslow Iron haul road Mineral Resources Limited (ASX: MIN) (MinRes or Company) is pleased to announce that the Foreign Investment Review Board has provided unconditional approval for the sale of a 49% interest in the Onslow Iron haul road (Haul Road) to investment funds managed by Morgan Stanley Infrastructure Partners (MSIP) for total expected proceeds of $1,300 million.

At 28th Aug: FY24 net debt of ~$4b)

Kudos to BHP kept away from the lithium theme Read below:

Buying BHP shares? Here's why the ASX 200 miner won't be digging up lithium (fool.com.au)

Published July 28, 2023 12:11 pm AEST

But Slattery said BHP shares won't be getting an exposure to lithium. As The Australian Financial Review reports, that's because the big miner doesn't believe it can construct lithium mines at the same large scale and accompanying low costs that have made its iron ore and coal segments so profitable.

BSc, Physics

MSc, International Management

Experience:

Geraldine Slattery, President Australia, leads BHP’s Australia business comprising Iron Ore, Copper, Nickel, Metallurgical and Energy Coal operations in Western Australia, South Australia, Queensland and New South Wales.

Prior to her current role, Geraldine was President of the BHP Petroleum business headquartered in the US with Assets across the Americas, Caribbean, Australia and North Africa.

In her 30 years with BHP, Geraldine has progressively taken on more complex technical, commercial and business leadership roles in Australia, the UK and the Americas, establishing a reputation for creating value through empowered, safety, performance and growth-oriented teams. She also has extensive experience of working with partners, communities and governments in diverse jurisdictions.

Geraldine began her career in project engineering roles in Europe and Australia, within the refining and pharmaceutical sectors.

I made some recent notes for MIN, duplicated (below) for those interested.

• The perfect storm – recent market sell-off likely due to a combination of factors: low Iron Ore and lithium prices, concerns around China demand for iron ore, lots of debt and the business being in a CapEx cycle, despite the concerns around them.
• At time of writing, MIN’s market cap was 5.95b. MIN’s Mining Services recently delivered 550m of EBITDA in FY24. This is a fantastic business – steady cash flows not impacted by Iron Ore cyclicality. Onslow will be serviced by their Mining Services division, so EBITDA should be increasing -- and materially -- over the next 24 months. This division ALONE justifies the current share price / market cap for me.
• Their lithium, iron ore and gas ventures are less fantastic, although the recent Onslow project has enhanced their competitive advance re: Iron Ore production.  
• MIN was previously a high-cost producer of iron ore, that would ramp up and down to suit market conditions (when they could make a buck). Onslow changes this – despite being joint-owned (with MIN owning majority) production costs have more than halved. This changes the game for MIN.
• Iron Ore costs dropped below $US90 recently. Management recently said that Onslow provides them with the ability to stomach a $US65-$70 iron ore price and still make 20% return on invested capital.
• Yes, there is significant debt, but my bet is plenty of investors don’t understand this debt properly. Are they in danger of defaulting? Don’t think so. Will they go broke? Definitely not. Repayment of the debt is attractive – not a cent to be repaid until 2027 (how on earth did Ellison swing this?!) and lots of assets on the balance sheet.
• Onslow hits full capacity next year – will provide meaningful cash flows that will curb current market concerns.  
• Grey clouds above our heads short term. But those that can stomach the volatility will likely make market-beating returns (and then some) at these levels – a classic contrarian purchase. I am happy to sit tight and wait.

Minres has announced the Foreign Investment Review Board has approved the sale of the Onslow haul road, and that all sale conditions have now been met.

They expect to receive $1.1 billion in the next 15 days, and use that to cancel a $750 million bridge facility. A further $200 million is expected June 2025 (assuming Onslow reaches full production by then).

Net debt is currently ~$4.4 billion.

I have initiated a half position today in MIN today and want to thank all the Straw people who have provided a valuable discussion, which I hope to add the below. 

Having flagged $40 as an “Looks interesting” price for MIN but already having enough Iron Ore exposure, I felt any issues with Iron Ore prices were mitigated at the $32 price point. 

My Thesis and also a summary of Gaurav Sodhi’s discussion of MIN on Stock Take that dragged my across the line to a buy:

Thesis: MIN is reeling from a 4-punch combo, but each is a temporary pain that should convert to long term gain:

1.     Lithium business is at best currently break even at current prices, having previously generated over $1b in EBITDA this is being valued at nil. Current prices may persist for a while but supply will drop eventually and provide profitable opportunities, not anywhere near previous records, but more than enough to add value. [modest upside optionality with moderate probability]

2.     Iron Ore prices have pulled back, making MIN’s current high-cost mines that had been profitable now marginal and loss making at lower prices. The new Onslow project will change this equation with EBITDA of $800m possible at US$90/t prices and a break even point around US$50/t. However, this will not start operating until mid-2025 and has required $3b in capital up front, which is the cause of it’s debt issue. [high upside opportunity with high probability]

3.     Mining Services business is being discounted with commodities generally but alone justifies the current share price with EBITDA of $550m. This will increase to $1b EBITDA once Onslow is online. [underlying value of business providing margin of safety]

4.     Debt levels of $4.4b are considerable given current commodity prices mean that the Lithium and Iron Ore parts of the business offer no debt servicing. However, the Services business can cover this cost and payment doesn’t start until 2027 by which time Onslow will have been operating for over a year providing additional cash along with almost doubling the Services business cash flows.

Buying now on the view that equity markets have viewed current low profits as long term and as such see debt burden as an excessive risk and unserviceable. I don’t expect any upside in share price for over a year until Onslow is online and will complete the position at below $30, or just enjoy upside on half the position if it bounces from here.

Gaurav Sodhi (MIN discussion notes): 4/5/24 Stock Take (Intelligent Investor)

·        Service Business EBITDA around $1b justifies current price, it’s a crushing business that continues irrespective of price so provides steady and stable cash flow.

·        MIN has transferred form one of the highest cost producers (A$100/t) to a low-cost producer (not as low as FMG, BHP, RIO but low enough).

·        Oslow mine online Jun25, Iron Ore costs of A$65-75/t so profitable at US$50/t price (20% ROC expected at US$70/t price). They get 90% of cashflow in first year so accelerated cash flows.

·        Debit will peak at $5b so scary BUT is relatively cheap due to being mostly US bonds and bond markets have not discounted it indicating that share market concerns of insolvency are overstated (bond market is always right…). Service business is able to pay for the debt and there are no payments on that debt due until 2027.

·        Expect 70% of global Lithium capacity is loss making at current prices, so supply should fall and price recover.

·        Issue at the moment is they have just deployed $4b on projects that are yet to produce any revenue, so PE out of whack. Also low probability events (disasters) are being priced as a certainty that would require sale of assets at fire sale values.

Disc: I own RL

Yet another Fundie view on MIN today - this time in an interview on Livewire with Katana Asset Management's Romano Sala Tenna

This stock has fallen 43% in 12 months. But is it really as bad as it seems?

Gaurav Sodhi (who I personally rate more highly than the various investment bank broker analysts - however he's an acknowledged MIN bull and also personally owns shares in MIN so ...) from Intelligent Investor has also just posted their updated report on MIN - if you're an II subscriber it's a worthwhile read

Key Points

• Lower commodity prices hit profits
• Debt levels continue to climb
• Lots of options remain

He say's "the risk is real", however ...

Managing risk is a key task for any business and any investor. It is not the same as avoiding risk altogether. We accept that higher debt has raised risk levels and the swift crash in MinRes's share price results from concern about the balance sheet

Yet MinRes retains the assets, the experience and the track record to navigate this period. The share price now counts little more than the services business. A significant iron ore business and one of the world's largest lithium miners is being ignored. Value is now on offer

The times of greatest opportunity aren't signalled with trumpets and flags but with trepidation and doubt. This is one such moment. BUY

DISC: Held in SM & RL (and added a little more in RL today)

Enjoying the MIN discussion - FWIW A few Analyst reports out overnight - broker views are "mixed"

CLSA: Hold 12m PT $41.50

MIN’s FY24 results showed strong revenue at A$5,278m, beating consensus by 9%, but debt and profits raised concerns. Ebitda dropped 40% YoY due to weaker lithium prices, and net debt increased to A$4.4bn due to heavy capital spending. With FY25 capex projected higher than consensus at A$1.95bn, financial strain is a concern. Amid lithium market challenges, CEO Chris Ellison noted that "no one is making money," leading MIN to cut production and delay non-essential capex. Though resilient in rising markets, MIN is struggling in the current environment, prompting a target price cut from A$60.00 to A$41.50 and a downgrade to HOLD

Macquarie: Neutral 12m PT $48

Long way to the top

Key Points

• MIN’s FY24 result was mixed, with an underlying earnings beat but guidance misses for production and capex
• A production pull back from Mt Marion was especially alarming considering the Ganfeng offtake and services margins at the mine
• We cut our TP by 20% to A$48ps with a lower production outlook and higher capex expected. Reiterate Netural on a volatile base 

RBC: Outperform 12m PT $73

While the FY24 financials beat, the focus of the result was the higher than expected capex at Onslow Stage-1, deferral of Onslow Stage-2, and the rationalisation of lithium volumes to better align with market conditions. Incorporating the lower guided volumes/higher capex and removing Onslow Stage-2 from our base-case has resulted in EBITDA being reduced over our forecast period and our price target lowered 8% to $73. Over the 12-24 months the strategy is clear; prioritise the balance- sheet, reduce capex, operate the asset for cash flow. We see peak gearing in 2HFY25 as Iron ore capex declines. Outperform retained

Morgan Stanley: Overweight 12m PT $70

Despite lower cash generation in FY25 slowing the rate of the deleveraging, we still see MIN's transformation journey as one that is achievable with a reasonable buffer to weakness in commodity prices, leaving an equity raise unlikely at this stage. We see enough upside for LT investors Stay OW

DISC: Held in RL & SM

These kind of diktats don't sound particularly appealing to me, if I was an employee. Atleast he's trying to make up for it with the in-house perks...

https://www.theguardian.com/business/article/2024/aug/29/australian-billionaire-boss-coffee-breaks-office-chris-ellison-perth-mineral-resources

MIN handed in thier 'report Card' in Release Date: 28/08/24 19:22

Its a B - minus - the markets have played havoc here:

• Revenue of $5,278M, up 10% (FY23: $4,779M). -
• Underlying EBITDA of $1,057M, down 40% (FY23: $1,754M).
• - Underlying Net Profit After Tax (NPAT) of $158M, down 79% (FY23: $769M).
• Statutory NPAT of $114M, down 53% (FY23: $244M).
• - Operating cash flow before financing and tax of $1,909M, up 9% (FY23: $1,750M), including iron ore customer prepayments of $600M. Excluding the iron ore prepayments, cash conversion was 124%

• Strong liquidity position maintained during peak investment for Onslow Iron
• - Completed US$1,100M Senior Unsecured Notes Offering in October 2023.
• - Executed an iron ore customer prepayment of US$400M ($600M).
• - Available liquidity of $2,833M (FY23: $1,791M), including cash of $908M (FY23: $1,379M). -
• Net debt of $4,428M (FY23: $1,896M).

Presentation

Performance:

CommSec | Quotes & Research

Return (inc div)   1yr: -30.44%   3yr: -4.00% pa   5yr: 31.93% pa

26-Aug-2024: MinRes' corporate governance has always been a little questionable, as it often is when it's one guy runnning the company as he sees fit - similar to Andrew ("Twiggy") Forrest at FMG, which is why the senior management at Fortescue don't seem to last long. Chis Ellison's MinRes (MIN) does not have those same issues with heaps of senior turnover, but this AFR article this morning is worth noting:

Chris Ellison’s daughter earns millions for MinRes shipping work

by Neil Chenoweth, Senior writer (AFR), Aug 26, 2024 – 5.00am

The daughter of Mineral Resources chief executive Chris Ellison has earned millions of dollars in undisclosed fees after her company was given preferential treatment to help ship the group’s iron ore exports, according to governance advisory group Ownership Matters.

An analysis of port records shows that Ship Agency Services, founded by Kristy-Lee Craker in 2011, has made as much as $10 million through hundreds of ships that have loaded Mineral Resources iron ore since SAS was set up in 2011.

Ship owners have been required since at least 2016 to use Ms Craker’s company when carrying the group’s iron ore exports.

Kristy-Lee Craker, managing director at Ship Agency Services. 

Ownership Matters said port records showed that Ship Agency Services “is listed as shipping agent for hundreds of ships loaded with MinRes product that have sailed from the ports of Esperance, Dampier and Port Hedland over multiple financial years as far back as 2016”.

A review of hundreds of cargoes showed that all but a dozen shipments or fewer were handled by Ms Craker’s company.

Shipping agents provide myriad services, from organising documentation to port authorities and shippers to monitoring vessel operations, transport and crew arrangements.

The Ownership Matters report says her firm has chartered more than 1000 ships since it was set up. Industry standard rates for bulk carriers in Australian ports range between $5500 and $10,000 per engagement. Estimates of the fees paid to Ship Agency Services run as high as $10 million.

MinRes confirmed to Ownership Matters that Ship Agency Services was the group’s preferred shipping agent. However, it said payments to the firm did not have to be disclosed as related party transactions, because Ship Agency Services is engaged under contract with, and is paid by, the ship owner.

Mineral Resources said it was common within the industry to nominate a shipping agent. Ownership Matters is not suggesting the arrangements are improper.

Mineral Resources CEO Chris Ellison.  

MinRes also uses a marine surveyor company, Propel Marine, set up by Ms Craker in 2018, to perform vessel draft surveys, inspections and marine warranty surveys on ships carrying the group’s iron ore. This leads to the unusual position where safety checks on MinRes ships are the responsibility of the daughter of the CEO.

“These services were performed at arm’s length rates,” a spokesman told Ownership Matters.

“It is common in the commodity industry for industry participants to recommend the use of a preferred ship agency. This enhances efficiency, safety and productivity in the loading or cargoes.

“MinRes has a process in place to ensure its shipping arrangements are in line with the market, and at commercial rates.”

Ownership Matters noted that “unlike BHP, Rio and Fortescue, ship agency at MIN has never been subject to a competitive open tender process.”

SAS also acts as shipping agent for ships owned and operated by Mineral Resources. These direct payments to SAS from MinRes as the shipowner are caught by the related party rules and should be disclosed. A Mineral Resources spokesman said that “direct transactions” between MinRes and SAS over almost 10 years were only “approximately $0.5 million in aggregate”.

In 2023, MinRes reported $428,000 in related party transactions involving SAS for “import/export services”, following $247,000 paid in 2022, but said the figures would be higher in 2024.

“This is due to the critical role played by SAS in facilitating the importation of key items for the Onslow Iron Project,” a spokesman said, an apparent reference to the acquisition of trans-shippers.

Until last year both Propel Marine and Ship Agency Services operated out of offices leased by Mineral Resources from a trust in which Mr Ellison has a 51 per cent interest. A MinRes spokesman told Ownership Matters that SAS paid rent for the offices.

An earlier Ownership Matters report in June raised questions over related party issues when MinRes invested in Wildcat Resources and Kali Metals.

--- ends ---

Source: https://www.afr.com/companies/mining/chris-ellison-s-daughter-earns-millions-for-minres-shipping-work-20240824-p5k51h [Today, 26-Aug-2024]

Disclosure: I am not directly exposed to MIN, FMG, BHP, RIO or any other iron ore companies at this point. I have also stepped aside from direct investing in any lithium companies for the time being. I admire and appreciate what Chris has achieved with MinRes and what Twiggy has achieved with FMG, and I have certainly made money from both companies, however I don't want exposure to either of them at this point in time for a variety of reasons, but underlying commodity exposure is the main one.

MIN looks to have hit guidance from all divisions. Any recovery in lithium would really kick this along but I don't see that happening especially with China in a slump and a possible Trump Presidency weighing on sentiment.

Lithium

Operator

Our next question today is a text question, which is coming from David Feng from CICC. David says, "It's great to see that your lithium pricing performed much better than your peers. Could you remind us of the pricing methodology for lithium, e.g., what referencing indices should we refer to? And is there any provisional adjustment terms?"

Christopher Chong

Thanks, David. Thanks for the question. Yes, I think the best way to be thinking about our realized pricing in our lithium business is there are 5 index prices around spodumene. And if you took an average, that shouldn't be too far off the mark. Now there might be times where we might try to link it to chemicals, but that will be a dynamic, and we'll take a view on that. But I think for now, the best way to think about it is just look at the spot indices as a diverse reference.

In terms of discount to the like, as you know, with Mt Marion, you need the grade adjusted. But for our 3% product, there is an additional discount there that you need to take into account. But beyond that, just look at the indices that you can see in the market.

Iron Ore

Lachlan Shaw

Two from me. Firstly, on Onslow and just on the sort of FOB cost guidance. We're seeing a number of your peers guiding to sort of 4% to 5% inflation in the next 12 months. Just wondering, are you still comfortable with the AUD 45 per tonne FOB, including infrastructure charge, at Onslow at 35 million tonnes per annum?

Chris Soccio

At the moment, we are. So we've been able to control our costs, and we're performing well within the operations. Obviously, we need to get to nameplate to obviously realize those prices, but we're still confident that it's an accurate guidance

Debt really does seem to be a relative non-issue:

"Turning to the balance sheet. In relation to the sale of our 49% interest in the Onslow road to Morgan Stanley Infrastructure Partners, we expect to receive further approval soon. So the first payment of $1.1 billion will be received this half.

We expect FY '24 net debt to be around $4.4 billion. And I'd like to take the opportunity just to remind people that our unsecured U.S. bonds have no financial maintenance covenants of any kind, and the earliest maturity is in May 2027. Overall, we have significant liquidity of $2.8 billion at 30 June. This includes cash of $900 million.

We entered into a $600 million iron ore customer prepay, not dissimilar to what FMG has done in the past, and we see this as a good diversification of funding. It's non-dilutive, it's a non-debt form of capital, and will be treated as such in our accounts as well other peers, and that's how our rating agencies view it, too. It's cost competitive and unsecured, and we restructured the repayment profile to align with our cash flows, with amortization over 3 years starting in FY '26, which is when Onslow would be at the 35 million tonne run rate.

As previously announced, we entered into a $1.1 million bridge facility with JPMorgan, and we expect that to remain undrawn, and we will cancel it upon receipt of the first $1.1 billion of payment from the road sale.

We also upsized our undrawn revolving credit facility from $400 million to $800 million, reflecting our larger business size.

I'd also like to highlight our Onslow carry loan receivable of around $500 million, which we will earn interest on. This gets paid back from 80% of our JV partner's free cash flow. So effectively, we will receive 92% of MineCo free cash flow.

We know we are at peak leverage over the next 6 months, and that will start to deliver very quickly as Onslow ramps up and cash flow grows. Our Onslow ramp-up targets are unchanged. We are targeting 20 million tonnes per annum by the end of the year and 35 million tonnes in June next year. And to highlight the earnings potential for Onslow for us, at the 35 million tonne run rate and at spot prices today of around USD 100 a tonne, Onslow generates EBITDA for MinRes of $1.3 billion. So clearly, the payback on our capital is very rapid."

,,,,

Ben Lyons

I really need to clarify the net debt amount, please, if we can get that out of the way upfront. Further to the question earlier, it appears you've included the cash from the prepayment but not the debt in your net debt calculation of $4.4 billion. Is that correct? So it would be $5.0 billion, if you actually reflected the fact that you have to repay this facility just in iron units rather than cash.

Christopher Chong

Ben, thanks for the question. Yes, to clarify, the $900 million cash, we have a $600 million cash of the prepayment in that. And as for the opening remarks, it will be in the current liabilities as a prepayment, but it won't be in the borrowings or net debt, and that's how it's accounted for.

....

Paul Young

Yes. Okay. All right. And then maybe further, Chris, sorry to interrupt, just further to the accounting treatment. It sounds as though this is being classified, say, FMG, a decade ago, when they did the prepayments as deferred income on the balance sheet. We're effectively recognizing the revenue, but not the cash receipts from customers through the cash flow statement. That's simply how we're accounting for this.

Christopher Chong

Yes, it's exactly the same way to be treating it. Yes, we might not call it deferred income, we'll just call it prepayment in the accounts, but yes, it'll be the same accounting treatment as done by FMG and others.

.....

The $600M prepayment is interesting - its $200M pa for 3 years at spot rates - not fully clear what the buyer gets out of the deal, wouldn't have though supply was an issue but anyway alleviates more risk.

Glyn Lawcock

Firstly, just on the prepayment again. My parents always told me there's no such thing as a free lunch. So on the $600 million prepayment, like what is the gentleman on the other side, the company on the other side, getting in return? Is there a bigger discount? Or are you paying interest? There must be a rub on the other side. I'm just trying to make sure I understand what it is.

Christopher Chong

Glyn, thanks for the question. Look, there's nothing we can disclose in terms of who the other party are or is. As I said, we've got commercial agreements in place. It's not similar to other prepayments, Glyn, and the terms are not dissimilar as well. That's all I can really say.

Glyn Lawcock

But there must be something.

Christopher Chong

Yes. No, no. And it is very cost competitive. So if you look at where our bonds trade, et cetera, it's not materially different, I'd suggest.

Glyn Lawcock

Okay. So there's some rub on the other side. And then maybe just a question on Onslow and the build-out. Chris, you mentioned similar capital intensity, which is AUD 85 a tonne on the first 35 million tonnes. That would suggest another [ $1.3 billion ] for the remaining 15 million tonnes to get to 50 million tonnes. Is that about right? It seems like I would have thought you've already built the hall road, so that $500-odd million should come out. You have to repeat that. So I would have thought the capital intensity be cheaper. And is that sort of -- we should expect that over the next couple of years, spend?

MIN looking more attractive this morning, at a 52 week low

Chart fest from Morgan Stanley:

[held]

Notes from Business Breakdown podcast on MinRes

Fraser Christie from TDM Growth Partners was interviewed on the Business Breakdown podcast to discuss Mineral Resources.

Fraser is bullish on MinRes, describing it as “one of the best performing stocks of any business listed anywhere over the last 18 years”. He believes the business is still misunderstood by many analysts.

He splits the business into two segments. The first he calls InfraCo, which builds and operates infrastructure for mines. They design and build infrastructure in house, meaning they can do it faster and cheaper compared to others who outsource these capabilities. 

The infrastructure part of the business not directly exposed to commodity prices since they charge by volume. It’s also long term, recurring revenue, typically for the life of the mine. The InfraCo business is charging a fixed fee on volumes, and so it's not exposed directly to commodity prices.

The second part of the business Fraser describes is MiningCo which owns mines for the infrastructure part of the business to operate. MiningCo includes iron ore, lithium, and some gas. 

So the idea is to acquire a mine, InfraCo develops the infrastructure to build/expand and operate the mine. MinRes can either operate the mine or sell a stake in it.

MinRes has an emphasis on efficiency. Their lithium mines are some of the lowest-cost producers in the world. The iron ore mines have traditionally been higher-cost producers, but are moving to lower-cost, higher-volume operations.

Fraser identifies two possible risks to the continued growth of the business: 

1. loss of key personnel, such as founder CEO Chris Ellison retiring, or significant turn over in key staff, and

2. debt. Fraser argues the current level of debt is sustainable, and trusts management are experienced and incentivised to manage it well.

Fraser suggests that the current price is a reasonable entry point for longer-term investors:

…the business currently has a $12 billion market cap, but they've got an infrastructure business that could be worth $12 billion stand-alone. I would say there have been various moments in time where you could own this business just on the valuation of InfraCo and get Mining Co for free.

Are we in one of those moments right now? I'll leave up to everyone else, but that has been a core part of our thesis, is that InfraCo is undervalued by the market,

 So he thinks the infrastructure part of the business alone is undervalued, and the mining business is being valued at zero.

[Held RL and SM]

Massive pullback of the share price this week from the unfortunate news of the Yilgarn Hub closure

I know a month ago I mentioned about hoping for a pullback, but not in this sort of situation. Hopefully those workers get redeployed on other work.

Tempted to dip my toe in here but instead I will do some research...

In the last JPM report (June 24), I found a few extracts about Yilgarn that looked interesting

Yilgarn last quarter produced 2.1mt.

I guess Onslow will produce 10mt in next quarter so that makes up for the shortfall.

And below is the JPM valuation of Yilgarn which is only a few cents compared to Onslow.

So the share price fall of (7%) appears to be a big overreaction. However the market is probably factoring in all the costs associated with site decommissioning and rehab at Yilgarn.

Of course former dog and possibly the Neuren equivalent of Iron Ore RHI has hardly reacted with the 200m milestone payment now a certainty

[holding RHI, thinking about MIN]

05-June-2024: 7:22pm: MinRes-sells-minority-stake-in-Onslow-Iron-Haul-Road.PDF

0:00:00 Introduction

0:01:36 MINs bring the cash

0:04:51 The Onslow iron ore hopefuls

0:17:48 What's going on in uranium

0:31:59 Sheffield start stumbling

0:39:39 Novelis ditch IPO plans

0:44:04 Leaky deals on the ASX

Disclosure: I hold MinRes (MIN) shares.

21-May-2024: Onslow-Iron-delivers-first-ore-on-ship-ahead-of-schedule.PDF

This is an important milestone for MIN. The whole sector (iron ore) is down today, so they're not getting the love they deserve for this achievement today, but it will come. I think this is another "up yours!" moment for Chris Ellison - because people definitely had their doubts especially a number of analysts who love to hate on Chris and MinRes. He was too bullish. His timeline wasn't achievable. He was too abrasive and abusive during analyst briefings and investor calls. Well, Chris isn't trying to win any popularity contests. He's running a business. And as businesses go, it's one of the better ones for sure.

MIN closed at $79.49 yesterday. MIN and RIO are both down by around -1% today. FMG -0.5%. BHP slightly up, but essentially flat, however BHP is trying to takeover Anglo American, so there's that - BHP would become a copper play if that goes through, which it probably won't - see here: BHP debates improved Anglo bid as time runs out in takeover saga - MINING.COM

I hold MIN.

I hear lots of bear cases and chartists calling MIN overvalued due to possible balance sheet pressure especially in regards to the Ashburton hub.

However it appears MIN is addressing this with divestments of non core assets (including their sale of DVP and AZS shares). Definitely got lots of options on the table to relieve the balance sheet.

I don't know but I think I can only see upside from here.

Pity I missed buying the dip around $52 back in February..Should have just gone a bit generous on my order.

On another note I got blocked by some guy on Twitter when they were calling $60 and I said it is now $70. Some people are too sensitive...

But I wouldn't mind seeing a pullback which may never happen now.

0:24:50 MinRes - Katana Asset Management's biggest holding - Romano Sala Tenna tells us why [19-Feb-2024]

Disc: I hold MIN (MinRes) both here and in my larger real money portfolios.

The AFR released an article this afternoon titled, "Billionaire MinRes founder slams critics over balance sheet".

Mineral Resources founder Chris Ellison slams critics over balance sheet

Just a few things that made me smile, highlighting why I like this company, and love the way Chris Ellison goes about it.

• “We have so many friggin’ levers we can pull,” he said in response to the balance sheet doubters.
• Mr Ellison suggested he felt pressure to sell a 49 per cent stake in a 150-kilometer private haul raod that connects the mine to the Port of Ashburton on the west Pilbara coast.“The pressure I’m under at the moment with everyone whining and bitching, [I’m] going to go out and sell half of it [the haul road] just to put the money in the bank and go like ‘f--- you’,” he told analysts.
• Mr Ellison said MinRes would limit production at the Wodgina lithium mine it owns in partnership with New York-listed Albemarle until prices improved in a market dominated by China. “When Mr. China decides to pay us enough [for lithium], we’ll turn it on,” he said.

In my view, there is a lot of criticism of Chris Ellison... a man who has proven himself as a great CEO who makes very sound and strategic decisions time and time again.

Half Year Results - FY2024 - Mineral Resources Group

The SP has been hit since the start of the year, aligned similarly with commodity pricing - with highs of around $91, it has been on a steady decline to where we see it today at around $60.

In my humble opinion, this is an underrated company that is treated like a producer, however potentially shouldn't be treated quite the same...

A few key financial points from todays announcement:

• Revenue increased by 7% to $2,514.7 million.
• Statutory net profit after tax rose by 33% to $518 million.
• Underlying EBITDA was $674.9 million, a 28% decrease.
• Iron ore segment revenue up by 37% to $1,329.4 million.
• Significant expansion and acquisition activities in the lithium segment.
• Declared a fully franked interim dividend of $0.20 per share.

They've also provided a review on their operations for the first half:

Mining Services:

• Production volumes were within guidance and delivered an underlying EBITDA of $253 million.
• Awarded five (5) new contracts and renewed three (3) contracts with Tier 1 clients.

Iron Ore:

• Construction of Onslow Iron remaining on budget and on track for shipments in June 2024.
• Sales volumes reaching 8.7 million wet metric tones, aligned with guidance.
• Underlying EBITDA of $266.2 million, up from $37.1 million in 1H23.

Lithium:

• Commissioning of Mt Marion plant expansion, resulting in 99,000 dry metric tons of SC6 equivalent spodumene concentrate shipped, up 39%.
• Pre-strip activities at Wodgina were well advanced, with an increase in shipped concentrate of 36%.
• Acquisition of Bald Hill, effective 1 November 2023, and the completion of the MARBL joint venture restructure in October 2023, which increased Mineral Resources' ownership in Wodgina to 50%.

Energy:

• High-quality clean gas intersected through drilling activities at the Lockyer-3 appraisal well.
• A development application for a gas processing facility was submitted, with a Final Investment Decision expected in 2H24, subject to WA Government agreement for partial export.

A few risk areas from my point of view:

Lithium and iron ore price along with market and economic conditions:

• An obvious one, however the lithium and iron ore segments of the business could take a hit dependent on the price of both.
• The lithium segment already saw some performance issues, despite the offset of lower costs due to higher plant recoveries and increased volumes.
• To some extent, the global economic environment with overall fluctuations in commodity prices and demand for these resources.

High capex and failure to execute:

• They've made some significant capital investments through the development of Onslow Iron, the expansion of Mt Marion and the acquisition of Bald Hill - Yes, there is no doubt that these are strategic investments, they were also a substantial outlay of funds.
• If these investments don't hit the mark for the expected returns, or their delayed, the market may not look at them too favorably.

The following is directly from the Director's Report:

Underlying operating cash flow before financing and tax7 of $820.8M was up $261.5M on pcp, representing a conversion rate from Underlying EBITDA of 122 per cent.

• Progressed development of Onslow Iron, with all major approvals received and equipment orders placed. Construction is expected to be within budget and remains on track to deliver first ore-on-ship in June 2024. Drill and blast and load and haul operations commenced in the period. The Onslow 300- room construction village has been completed and is fully occupied. The transshipping wharf was completed and the shiploader was installed in December 2023. Successfully completed first transhipper sea trials, with the first two transhippers scheduled to arrive in 2H24.
• Mt Marion expansion commissioned and ramping up.
• Pre-stripping of Stage 2 and 3 at Wodgina.
• Continued focus on gas exploration in the Perth Basin. Commenced assembly of a new automated drill rig, expected to be operational from mid-2024.
• Investment to support new Mining Services contract wins.
• Acquisition of Bald Hill with project control assumed on 1 November 2023.

As I write this today, the market has seen these results as positive, and the SP has increased by around 4% to $61.50.

I'll be doing my own valuation on the financials this evening (pending my 11 month old daughter's sleep routine... which is ever-changing) and I'll post that at some stage. Might even give the McNiven's Formula a whirl, thanks to @Rick's presentation the other night.

Cheers,

Tom.

Disclosure: I hold both in my real-life portfolio and on Strawman.

An Overview of the Lithium Market - Why Prices Needed to Fall

Author(s): Daniel Ortisi

Date: 8 February 2024

An Overview of the Lithium Market – Why Prices Needed to Fall

Much has been said about the rapid rise and fall of lithium. It was the hottest sector on the Aussie market from 2020 to the peak in November 2022, driven by an incredible 600% increase in lithium prices. We saw developers such as Liontown Resources (#LTR) go from a penny dreadful 10c stock to one of the largest takeover stories for a pre-production mining company in years, at an eye-watering $6.6 billion valuation (which was torn apart by Gina Rinehart). The country's largest hard rock lithium mine, Greenbushes, made (almost) the same profit as Commonwealth Bank (#CBA) in FY23 at over $10 billion. One operating asset making more money than a nearly $200 billion behemoth bank is truly incredible.

The Cyclicality of Commodities

But as quickly as commodity prices rise in times of mania, they fall in times of desperation. The response by mining companies was to increase output as quickly as possible to take advantage of mania prices, no matter the cost. Analysts at Wood Mackenzie suggest that the supply grew 45% in 2023, putting the market into surplus. It gets bleaker once you look at the supply forecasts produced by the investment banks. Goldman Sachs believes the lithium market will be in surplus until 2030. If true, we cannot expect lithium prices to rise above current levels. However, we should consider that mining and mineral extraction is a tough business and relies on variable factors such as:

• The ability to obtain project finance (take a look at Liontown’s recent updates)
• Government and ministerial permitting, approvals and regulations (~5 years in Aus, ~10 in Canada)
• Ability to mobilise large machinery and equipment (constrained by availability and cost)
• Sufficiently trained workforce; and
• Infrastructure is needed to transport material from the mine site to the end customer (spodumene is a bulk material).

In my view, it would be almost impossible to generate the level of anticipated supply growth as the forecasts suggest over the next 5 years, particularly in geographic locations that may lack the required level of infrastructure (Africa, South America) or lack geologically gifted orebodies (China lepidolite). Therefore, if demand continues to rise and prices do not appreciate meaningfully, the industry will not experience anywhere near the anticipated supply growth. Hence, the cure for high prices has been high prices, and the cure for low prices in time will be low prices. This may spark a commodity price rally sometime within the next 12 months, so long as the demand for lithium ion batteries continues to grow.

The risk to this thesis is that:

• The supply of lithium remains robust and ahead of demand.
• Demand for electric vehicles slows and remains in line with lower supply estimates or
• The lithium-ion battery chemistry is displaced by new technologies such as sodium. It is a genuine possibility and something to follow closely.

Source: JPMorgan estimates

Where Are the Opportunities

Higher-cost producers and small-scale operators are being forced to turn off operations. In my view, these represent the most significant risk of financial deterioration and should not be considered investment grade (#SYA, #CXO).

Lithium explorers and developers will struggle to raise finance at reasonable terms and hence may suffer dilutive capital raising or be forced to sell their projects to larger companies. Betting on a buyout is a highly speculative method of stock picking and not a part of our methodology at Stock Doctor.

Finally, the large producers with sufficient balance sheets and excellent assets who continue to make profits will be the best placed to take advantage of a weak market (consolidation, growth, minimal dilution).

Stock Picks

My top pick has been Pilbara Minerals (#PLS), who have a warchest of $2.1 billion in cash, a mine life in excess of 30 years and 100% project ownership to drive their own outcomes. Its valuation has been more resilient than its peers, but it should trade at a premium given its history of operating performance.

Secondly, Mineral Resources offers investors a diversified company underpinned by one of the highest-quality mining services businesses on the ASX. Its operations may have higher costs and come with lower project ownership. Still, the market should have faith in a management team that is highly aligned with shareholders and has a history of excellent dealmaking and flexibility.

Arcadium Lithium (#LTM) exposes investors to the lowest-cost form of lithium extraction in brine operations. The merger, at this point, remains a black box. Still, the company has an asset portfolio that can support a 200% increase in output over the medium term, which means the stock will likely have the highest leverage to recover lithium prices.

Finally, IGO Limited (#IGO) has had a terrible news flow in the past 6 months. Its 25% interest in Greenbushes is the jewel in its crown, but its minority ownership means the business may not have its interests aligned with its larger partners. Tianqi and Albemarle are reducing their spodumene offtakes and forcing the asset to stockpile ore likely until a recovery in market conditions. It is very unusual for a world-class asset to act like a marginal cost producer, which has been to IGO's detriment. At this point, long-term investors should be willing to be patient as the new CEO clears the decks and market expectations are revised. The quality and value of Greenbushes is worth a pretty penny, and it is the sole reason we retain its Star Stock status at this point.

The core to the investment thesis for MIN is the rapid growth occurring across its iron ore and lithium mines, which result in significantly higher mining services volumes. Unlike traditional mining companies, MIN benefits from having an integrated mining services company which scales with volume growth – and hence has less reliance on commodity prices to earnings. Given iron ore price strength in the near term, I view MIN as one of the highest quality growth companies to play commodity (whereas BHP, RIO and FMG have miniscule growth) while maintaining diversification.

The market does not understand MIN's business model well in our view, in particular how MIN continues to recycle capital from asset ownership to volume expansion (i.e, build, sell down, operate)– chasing the highest return profile possible and reducing reliance on commodity prices.

Longer term, MIN has ambitions to expand into the energy market with the discovery of the Lockyer Gas project in Western Australia. Whilst awaiting a formal investment decision, some analysts suggest the project is capable of delivering over $400m in annual earnings.

Publish Date: 25 Jan 24

Research Analyst: Daniel Ortisi

Diversified miner and services company Mineral Resources (MIN) provided a 2Q24 update. Overall, production volumes and shipments look slightly ahead of expectations however this is offset by lower realised pricing for lithium concentrate. No changes were made to FY24 production or cost guidance.

Importantly, management commented that its lithium operations remain profitable (before growth investments) despite the low pricing. We are seeing evidence of lower costs and higher throughputs at Mt Marion and Wodgina which is a major factor in our investment thesis.

Analyst View:

The thesis for MIN remains intact and we are confident in its long term growth prospects. Short term volatility is anticipated to continue given its large debt profile (due to growth expenditure) and low lithium prices.

Quarterly Summary:

• Mining services volumes 72mt, up 9% QoQ
• Iron ore shipments 4.8mwt, up 23% QoQ
• Mt Marion SC6 shipped 60kt (50%), up 54% QoQ
• Wodgina SC6 shipped 63kt, up 162% QoQ
• Wodgina chemicals sold 6.4kt, up 50% QoQ

07-Aug-2023: LIT-Landmark-joint-development-agreement-with-Mineral-Res.PDF

It's interesting. I hold MIN, but I do not hold LIT shares. Back on the 20th July, MinRes (MIN) announced that they'd made some big changes to their arrangements (via the MARBL JV) with Albemarle - Simplified-MARBL-JV-Agreement-Reached.PDF - and the market initially sent their share price up +5.16% (or +$3.72 to $75.78) before selling them down over the next fwo days by -9.86% to $68.31. Then, on July 26th, MinRes released their FY23-Q4-Quarterly-Activities-Report.PDF and their share price rose +4% (to close the day at $73.82).

Monday's announcement (reproduced above, with a link at the top of this straw) didn't result in much movement; just -0.77% or 54 cents down to $69.42, on a day when the overall market was slightly down anyway.

By contrast, on the same day - Monday 7th August 2023, the LIT share price finished the day up +66.67%. They'd been trading at 3.3 cents ($0.033) for a week, and they finished Monday at 5.5 cents ($0.055), which is also where they finished Tueday (yesterday evening) after trading as low as 4.9 cps and as high as 6.6 cps during the day (Tuesday).

While this is Big News for a $67 million microcap like LIT (possibly a nanocap coz they had a market capitalisation of only $40 million last Friday), it's not such big news for MinRes (MIN), whose market cap is now $13.5 Billion. MinRes are no longer small - they're an ASX50 company now.

There's always plenty going on at MinRes, but I reckon the market often struggles to know how to interpret it. Certainly, if the recent Money-of-Mine Podcast coverage of Chris Ellison on the latest quarterly earnings call is anything to go by, the analysts at Australia's major broking houses don't have much of a clue!

Here's what happened to the LIT share price on Monday:

lit

Good if you're a holder (I'm not), but the context is that they were trading at higher levels a year ago and people were just giving up on them and selling out for the past 11 months. That is a massive lift in volume for LIT though, ain't it?!

Those sort of movements no longer happen with companies as big as MinRes is these days, but they can and do still grind higher, and MinRes (MIN) do tend to trend well both up and down for weeks and months at a time, so you can also trade them if you've got the time. I've done that in the past, but I'm just planning to hold them now.

19-July-2023: I hold MIN shares in my SMSF, however I haven't been following them very closely for the past 18 months or so, and I recently (on Monday) added MIN shares back into my largest RL portfolio as well, which is more actively managed than my SMSF is - meaning I often leave my SMSF alone for months, and that happens less with my other larger portfolio. Anyway, I was going through their announcement list this evening and I came across this: Change-of-Director's-Interest-Notice---Justin-Langer.PDF [13-April-2023]

Not THE Justin Langer, surely?! Not J.L. ?! But, a quick google search revealed that yes, Justin Langer AM, former Australian Mens Cricket Team Coach, and legendary Test Match opening Batsman for Australia for many years - alongside Matthew Hayden AM - was indeed now on the MinRes Board - see here: https://www.mineralresources.com.au/news-media/justin-langer-joins-minres-board-as-non-executive-director/ [15-December-2022]

MinRes’ Chairman James McClements said Justin’s appointment demonstrated the high premium the Board places on diversity of experience.

“As MinRes continues to grow, we believe bringing in a breadth of expertise and knowledge is key to our success,” McClements said.

“Justin’s outstanding leadership experience will further enhance our focus on people and culture, which is critical as we continue to expand our workforce to execute on our significant growth strategy.

Together with the recent announcement of Colleen Hayward as Non-Executive Director, the Board is now well-equipped to address the opportunities that lay ahead for our business.”

Justin said he was inspired by Chris Ellison and the Board’s vision for the future of MinRes and their commitment to the people who have helped make the business the success it is today.

“As a proud Western Australian, I understand the vital contribution of the resources industry and I’m excited to join such an outstanding WA success story.

“I look forward to making a meaningful contribution and bringing my leadership and people and culture experience to the Board from the new year.”

[mid-December-2022]

I remember when Australian wicket-keeper/batsman Adam Gilchrist (who is also from WA) was a director of TFS, a Perth-based sandalwood supplier. That story didn't end well. See here: Adam Gilchrist scores post as TFS director (smh.com.au)

and here: TFS Corp: the big short you can't short (afr.com)

TFS became Quintis and then collapsed: Quintis collapse: investors left with thousands of worthless shares after company calls in administrators | The West Australian

I don't think that's going to happen to MinRes however. MinRes is in an entirely different league than TFS was.

I don't know how I missed this bit of news over the past 7 months, but I did. Not bothered by it either way. Just thought it was interesting is all.

Mineral Resources Limited (ASX: MIN) (MinRes or Company) has made a significant natural gas discovery, and also provides an update on the lithium business and Mt Marion exploration program.

MINERAL RESOURCES LIMITED (ASX:MIN) - Ann: Exploration and Lithium Business Update, page-1 - HotCopper | ASX Share Prices, Stock Market & Share Trading Forum

MIN Market Cap $14.17Bill

Noted share price taking a breather the moment.

Noted: the free flow has came off the boil.

Massive returns: Return (inc div)   1yr: 40.78%   3yr: 59.77% pa   5yr: 38.85% pa

maybe pick up some on price weakness

But IGO & PLS are good propects..

An article in todays AFR: MinRes to pay $970m for China Lithium Assets

From the article...

Chris Ellison’s Mineral Resources will stump up close to $1 billion for a share in lithium hydroxide plants in China in a rebuff to Prime Minister Anthony Albanese’s push for onshore processing of battery minerals into finished products

And US-based battery minerals heavyweight Albemarle has cast doubt on whether it will ever invest in another lithium hydroxide plant in Australia as big car-making nations demand downstream assets close to their home factories.

Albemarle has flagged WA becoming a lithium workhorse to the world rather than a maker of batteries and is eyeing more acquisitions in the state on top of its stakes in the world-class Wodgina and Greenbushes mines and a lithium hydroxide plant it has built at Kemerton an estimated cost or more than $2 billion.

New York Stock Exchange-listed Albemarle regards WA lithium mining and Chinese processing as joined at the hip for now, but is looking to supply hydroxide from Kemerton to other Asian nations and to send spodumene concentrate, an intermediate lithium product, to Europe where governments and carmakers want downstream battery minerals processing.

Albemarle president of energy storage Eric Norris told The Australian Financial Review on Thursday that WA was essential to the electrification of transport.

“All of these regions that are large automobile production areas are going through a significant transition to not only build electric vehicles, but to help build the supply chains in their countries to reduce the supply time, lead times, the CO2 (emissions) that gets involved in moving material around,” he said.

“The interesting fact of the matter is that neither China, we believe, nor the US, nor Europe can meet their EV ambitions without WA,”

Mr Ellison has been trying to convince Albemarle about the merits of building a lithium hydroxide plant near the Wodgina mine they co-own in WA’s Pilbara, but for now has agreed to acquire a 50 per cent share of two Albemarle plants in China at a cost of about $US660 million ($970 million), including an initial payment of $US350 million.

The downstream deal was unveiled on Thursday, less than 24 hours after Mr Albanese was lukewarm about Chinese investment in lithium and said his government wanted to see lithium-ion batteries produced onshore.

Mr Ellison offered supported for Mr Albanese’s sentiments on value-adding and said MinRes had been talking to the government about the best way to achieve that goal.

However, the mining billionaire said the investment in China would ensure MinRes could convert the spodumene from Wodgina mine into battery-grade chemicals in the short-term.

“Doing more here in Australia is my preference over the long term. Any potential future hydroxide plant in Australia that could take our spodumene is some years off. We need capacity today,” he said.

“We’re encouraged by the federal government’s commitment to grow the battery supply chain here in Australia and have been consulting with them on the best way to support industry to do it.”

Albemarle remains unconvinced about building another lithium hydroxide plant in WA after enduring cost blow outs and labour shortages it expects to continue in WA in building the Kemerton plant, but hasn’t ruled it out.

In addition to their deal on the Chinese plants, Albemarle and MinRes are restructuring the existing joint ownership of the Wodgina mine and the Kemerton plant in WA’s South-West.

Albemarle’s share in Wodgina will be cut to 50 per cent from 60 per cent while its ownership of the first two, 25,000 tonne-a-year production trains at the Kemerton plant increases to 85 per cent from 60 per cent.

MinRes is set to pocket $US100 million to $US150 million from Albemarle in the form of an adjustment payment that reflects the restructure being back dated to April 1, 2022.

Albemarle and MinRes will form a new 50-50 joint venture to produce lithium battery chemicals in China from spodumene produced at Wodgina.

Under the new joint venture, MinRes will pay for a 50 per cent share of Albemarle’s Qinzhou and Meishan plants in China.

Mr Ellison still wants Albemarle to agree to invest in downstream processing in the Pilbara where MinRes estimated a 50,000 tonne a year lithium hydroxide plant would cost $US650 million to build, and believes that is still a possibility under plans to expand the Wodgina mining operations.

Albemarle built the Kemerton plant to process spodumene from the Greenbushes mine where it has a 49 per cent stake alongside Chinese Tianqi and ASX-listed IGO, which have their own lithium hydroxide plant at Kwinana south of Perth.

Under the terms of the new arrangements, Albemarle will supply MinRes’ 15 per cent share of spodumene concentrate for processing at Kemerton from the Greenbushes mine.

MinRes, which does not have an ownership stake in Greenbushes, will pay the benchmark price for its share of the spodumene concentrate.

Mr Norris said Albemarle was on track to start selling hydroxide from train 1 at Kemerton in the second half of calendar 2023 as it finishes work on train 2.

He confirmed Albemarle remained committed to building trains 3 and 4, taking total capacity to 100,000 tonnes a year, in its own right and outside its partnership with MinRes in another sign of faith in WA.

Albemarle’s Qinzhou plant is up and running and has capacity to produce 25,000 tonnes a year. The plant is expected to start converting Wodgina spodumene in early 2024.

The Meishan plant will have capacity to produce 50,000 tonnes a year and is scheduled to be commissioned by the end of calendar 2024.

Mr Ellison, who hopes to produce low-cost gas from the Perth Basin to support downstream minerals processing in WA, said the new deals with Albemarle would cement MinRes’ place as a world-leader in lithium mining and leverage off Albemarle’s strong track record in battery chemical production.

Mr Norris said Albemarle, which reported December quarter sales of $US2.6 billion driven by lithium, said there was “tremendous opportunity” in the rapid growth of lithium-ion batteries.

He said Albemarle would consider the Asia Pacific region, including Australia, for any additional lithium hydroxide plant linked to any expansion of Wodgina.

Mr Norris noted there were advantages in operating close to mines in WA and through the Biden administration’s Inflation Reduction Act which applies to investment in Australia.

DISC: Held in RL

From an article in the AFR today: Is Chris Ellison’s MinRes buying Patriot Battery Metals?

Chris Ellison’s $16.9 billion iron ore and lithium producer Mineral Resources said via a spokesman it couldn’t comment on reports in The West Australian on Friday that it’s building a stake in Canadian lithium explorer Patriot Battery Metals.

Patriot Battery Metals didn’t respond to a request for comment on the report. The explorer has a primary listing in Toronto and issued chess depositary instruments (CDIs) on the ASX in December at 60¢ that have since raced to $1.67 on a market value about $1.8 billion.

After the report of Mr Ellison’s interest was published, shares in Patriot’s Toronto listing advanced another 8.4 per cent to a record closing high of $C16.20 on Friday. Patriot’s Australian chairman Ken Brinsden is the former chief executive of Pilbara Minerals and oversaw its 17-fold rise into a $5 billion lithium giant after taking the reins in 2016.

In January, broker Macquarie said drilling results showed Patriot Battery Metal’s Corvette lithium spodumene tenement in Quebec, Canada, was similar in high-grade quality to the world-leading Greenbushes Mine in Western Australia owned jointly by IGO, Albemarle and Chinese investors.

Confirmation of an investment by renowned battery metals deal maker Mr Ellison will fuel rumours of a planned sharemarket float of MinRes’ lithium assets to milk record-breaking prices and surging sector interest among US investors.

A September report in The Australian Financial Review revealed that MinRes and its JPMorgan bankers had looked at spin-off structures.

Hot strategic assets

Last October, Canada’s government effectively moved to ban Chinese investment in the nation’s lithium assets, amid North America struggles to narrow China’s huge lead in the race to secure raw material supplies for the clean energy transition.

As a result of Ottawa’s ban, ASX-listed lithium junior Winsome Resources bought a $2 million stake in Vancouver-based Power Metals from China’s Sinomine Rare Metals, after it was among a number of Chinese miners forced to divest lithium holdings.

On December 2, Australia’s Resources Minister Madeline King released a discussion paper on the future of Australia’s critical minerals industry. The Australian lithium sector has historically taken heavy investment from Chinese interests.

However, on November 30, Ms King stopped short of confirming the government was looking at curbs on Chinese investment in critical minerals based on national security, and acknowledged Chinese companies were important partners in developing resources projects in Australia.

Also, on November 30, the Albanese government introduced legislation to establish a $15 billion National Reconstruction Fund (NRF) mandated to invest in areas including battery supply chain development.

In the US, President Joe Biden’s executive announced its Inflation Reduction Act and threw $590 million in potential grants at ASX-listed, US-based battery supply chain players Novonix and Syrah Resources last October.

In the fast-moving space, MinRes already has a partnership with US lithium investor Albemarle after it struck an October 2019 deal that resulted in it selling a 60 per cent interest in its Wodgina spodumene mine to Albemarle for $US1.3 billion. It also stipulated the transfer to MinRes of a 40 per cent interest in two lithium hydroxide conversion trains built by Albemarle in Western Australia.

DISC: Held in RL

Some more interesting commentry around a potential spinoff of MinRes's Lithium assets in todays AFR (behind the paywall)

MinRes, lithium rally add weight to US spinoff case

Mineral Resources shares soaring to an all-time high on the back of huge demand for lithium stocks have re-ignited prospects of the $18.3 billion miner spinning out its lithium assets in the US.

The huge run, fuelled in part by heady buying in the cosy Perth broker set, has breathed new potential for the plans, which are gathering dust inside MinRes HQ.

The Perth grapevine was buzzing on Tuesday that MinRes was assembling a board keen to progress the spin-off.

Sources close to the company kiboshed the hype, saying any deal would still be a long way off. However, it’s all helpful at a time when MinRes is keen to capitalise on investor interest in the company and its lithium assets. It also spent considerable energy mulling its options last year, as revealed by Street Talk in September.

MinRes’ big run - to finish at a staggering $96.28 on Tuesday - came as broker UBS put out a bullish note on lithium and upgraded MinRes, Pilbara Minerals (also up 5.19 per cent on Tuesday) and IGO (up 4.49 per cent).

The bank’s note came just as NYSE-listed lithium giant Albemarle, a bellwether for the global lithium markets, beat consensus production guidance by about 130 per cent.

Those hoping for a lithium spin-off - or at least MinRes to use the assets to create even more value for shareholders - reckoned there was more behind MinRes’s spectacular share price performance during the day. Its quarterly numbers are due on Wednesday, and they were hoping for a nice set of results.

When Street Talk revealed the talks in September, MinRes boss Chris Ellison was out on front-foot, telling investors he didn’t have plans to “peel off” any business units “right now”. MinRes followed up with site visits to its Mt Marion and Wodgina lithium mines in early October, repeating the no-deal stance to analysts and investors who visited.

But investors know better than to take Ellison’s comments at their face value. As an example, he’s recently called Perth Basin gas “overvalued” while buying shares in M&A target Warrego Energy at a premium to either bid on the table.

More importantly, the big driver for MinRes’s mooted lithium IPO spin off is still very much hanging around the scene - the valuation gap between pure-play lithium businesses like Albemarle and roll-ups like MinRes.

While MinRes may not be able to serve up a lithium carveout to make the most of its all-time high, it did benefit at its M&A target Norwest Energy.

MinRes increased its offer marginally, from one-for-1367 shares to one-for-1300 shares. However, the share price pop (from $82 a share on December 15 to $96.28 on Tuesday) meant its bid for Norwest went from a 33 per cent premium to 65 per cent premium to its undisturbed price. It was enough for Norwest to recommend MinRes’ offer.

DISC: Held in RL

An interesting article in the AFR today (behind paywall)

MinRes turns kingmaker as it taps out of Warrego bid

Extract below:

Chris Ellison’s Wednesday night declaration that Mineral Resources does not intend to bid for Warrego Energy leaves it an envious spot, even if it has left investors with more questions than answers for now.

The most immediate one is MinRes’s claim that gas asset prices in Perth Basin are now over-inflated, just three days after it bought Warrego shares at as high as 39.2¢ a pop to round off its 19.17 per cent stake.

MinRes reckons its stake is a “strategic” one, making the whole statement even more of an oxymoron. It declined to clarify its comments.

The big question though is what’s the way forward for Warrego Energy, which has two takeover bids and three strategic investors squatting on its register.

There’s MinRes with 19.17 per cent and “no intention to make a takeover bid”, West Erregulla joint venture partner Strike Energy with 20.57 per cent and an unconditional one-for-one scrip bid, and Gina Rinehart’s Hancock Energy offering 36¢ a share if it can get to 40 per cent of the Warrego’s shareholders (acceptances were 26.1 per cent at January 12).

Two months ago, Seven Group-backed Beach Energy was also involved with a 25¢ a share cash offer.

While all that M&A attention has translated into exciting price action for Warrego’s shareholders (the stock has more than doubled from 17¢ prior to the bidding war to 39.25¢ now), its two current suitors are in a bit of a stalemate even if they are determined. (Both’s offers are open; Hancock’s closes on January 31 and Strike’s on February 13).

MinRes’s support key for rival bidders

For Hancock to come good on its 40 per cent minimum threshold, it will have to find acceptances worth another 13.9 per cent from Warrego’s constipated register, which has only about one-third of its shares still up for grabs.

However, Hancock has the target board’s support and the inherent allure of a cash offer. Also off its back, at least for now, is MinRes as a competing bid.

In the opposite camp, Strike needs to coax out close to 30 per cent in acceptances for its scrip bid if it wants control of Warrego (even though its bid has no minimum acceptance threshold), which is a tough ask too.

It’s hard to see how either wins Warrego without two of the three parties coming together. There are three combinations possible: Hancock-MinRes, Strike-MinRes and Hancock-Strike.

Hancock and Strike joining forces to win Warrego seems the least likely. At face value, the combination would do little for Hancock. If the two bought Warrego, Strike would have a controlling position on the underlying West Erregulla project, making it hard for Hancock to get much strategic gain from the investment.

Which means MinRes looks like it has the trump card, if you believe it can be trusted on its intention of not making a bid.

If MinRes threw its 19.17 per cent stake into Hancock’s offer, it would get Hancock over its minimum acceptance threshold and just shy of the 50 per cent controlling mark. Without MinRes, Hancock has an uphill battle of getting to either.

Were MinRes to go down the path of supporting Hancock’s bid, investors reckon, it would be pushing hard to strike a joint venture with Hancock for West Erregulla.

That would be a leaf out of Andrew Forrest’s playbook at Western Areas in 2022. Wyloo vouched its 9.8 per cent stake in favour of IGO’s bid for Western Areas (instead of bidding on its own and against shareholder calls for a higher offer given perky nickel prices) and concurrently announced a downstream WA nickel processing joint venture with IGO.

If MinRes was to vote in favour of the opposite camp, Strike, it would get a 7 per cent odd toe hold stake in Strike.

Like we said, MinRes’s wedged itself into a rather envious position where it can make or break either camp’s bid. It’s a very strategic stake, indeed.

A quick and interesting summary of some of Airlie Funds Management investment thesis on MIN in a youtube video:

Sector Spotlight: Mineral Resources

Vinay Ranjan discusses what makes Mineral Resources a unique business and how it’s positioned for future growth

DISC: Hold a small holding in RL

28-July-2022: MinRes-FY22-Q4-Quarterly-Activities-Report.PDF

MIN is up by almost 5% so far today on the back of this report. They are a significant iron ore player and by this time next year will also be a significant lithium player here in Australia. They have two of the world's largest known hard rock lithium mines (Wodgina and Mt Marion), and they have partnered with Albemarle whose Lithium Hydroxide refinery at Kemerton (200km south of WA's capital, Perth) is ramping up now after years of construction and they're already talking about a major expansion.

Albemarle lithium processing plant just weeks from first production already looking to expand - ABC News [16-May-2022]

Albemarle Bunbury lithium facility facing workplace safety investigation after complaints - ABC News [24-May-2022]

Image: One of MinRes' iron ore mines.

Disc: I hold MIN shares.

28-Jan-2022: I just read this article - Kemerton Omicron outbreak rapidly grows - which details an outbreak of the Omicron variant of the Covid-19 virus at the construction site of the Lithium Hydroxide plant being built by Albemarle and Mineral Resources (ASX: MIN) at Kemerton in WA, just north of Bunbury (south of Perth). Wouldn't be a major issue almost anywhere else in Australia, certainly not in the eastern states or SA, but it is in WA, which has a lot less active infections than those other states and they would like it to stay that way.

Some interesting bits from the article:

The first case of COVID-19 related to the plant was detected on Monday.

Of the 24 total new cases of COVID-19 detected in WA yesterday, nine were related to Kemerton.

It took the total Kemerton cluster to 16.

"They are all related to Kemerton and Albemarle in one way or another," WA premier Mark McGowan said yesterday.

"[The plant] has been under construction now for a few years and is an important investment for the state in terms of downstream processing of lithium."

. . . . .

"There are 30 contractors on site but one contractor and one work area in particular have been affected."

The work area has been temporarily suspended, with all close contacts in isolation, some at a beachside resort north of Bunbury.

[could be worse...]

. . . . .

The Kemerton development, a 60:40 joint venture between Albemarle and MinRes, comprises two 25,000 tonne per annum lithium hydroxide modules.

The US$1 billion project has already been plagued by delays due to WA's tight labour market.

Kemerton I was due for construction completion by the end of 2021, but Kemerton II was twice-delayed last year until the June quarter.

First lithium hydroxide is expected by mid-year.

. . . . .

Remember that MIN (who I own shares in) are currently an iron ore play and a mining services play, but they have these lithium assets that they are developing in readiness for higher lithium prices, including the Kermerton lithium hydroxide plant and the Wodgina mine which they believe is the largest known hard rock lithium deposit in the world. That mine is on C&M (mothballed) ready to be fired back up when prices are more supportive.

I don't see this latest issue at Kermerton as a thesis breaker. These sort of delays are going to happen during a global pandemic. Still, I wouldn't mind being a close contact and having to "isolate" at a beachside resort - perhaps here.

The following images are of the Kemerton Lithium Hydroxide plant over the past couple of years.

16-Jan-2022: While MinRes (ASX:MIN, Mineral Resources Ltd, a.k.a. MRL) is a mining and a mining services company, they are highly profitable. This straw is just about that and their key metrics, which are good and getting better. With the exception of net profit margin (NPM), which dipped in FY21, their growth has been impressive and is all heading in the right direction:

Source: FNArena.com

The main thing to note here is the quantum of growth in EPS and book value over the past two FYs and also the Divs, Revenue, and net operating Cashflow in FY21. Their growth has not only continued, it has markedly accelerated.

While it’s very hard to value their mining businesses because the value of the commodities (like iron ore and lithium) change daily, it’s relatively easy to value their mining services businesses – which mostly have recurring revenue at set rates. TDM Growth Partners described MIN, on November 19^th, 2019, like this:

“One of the most unknown, underappreciated, Australian innovation and commercial success stories, that since IPO in 2006 has achieved (and get ready to wipe your eyes in disbelief…);

• EPS growth of 15%
• Total shareholder return including dividends of 20x (26% per annum)
• Return on funds employed (pre-tax) averaging approx. 30%
• EBITDA to cash flow conversion of approx. 100%

Currently, this business has:

• A bulletproof balance sheet with $200m+ of net cash
• Inside ownership of over 15%

DO YOU WANT MORE?

What if we said it has the potential for EBITDA to grow over 20% p.a over the next 5 years 

STILL WANT MORE?

And the kicker…. This business is trading on FY20 PE (ex-cash) of 7x!!!”

On that day (19-Nov-19) MIN was trading at $14.67. They were $14.65 the day before and got down to $13.92 two days later. They are now over $65/share.

TDM finish their Nov 19 piece with this:

“And so, why such a mismatch between the market’s view and how we (and other long-term shareholders like Emma @ Airlie) view the business? Rather than thinking (and valuing) MRL like you would a typical mining services business, with earnings heavily dependent on the mining cycle, why would you not start to think of it like a Macquarie Group – yes there are market-facing businesses whose earnings will rise and fall with commodity prices, but underpinning this, after 13 years of track record, are very strong annuity earnings streams. To back this up, in the last 5 years, MRL have retained 96% of all of its mining services contracts (and the other 4% is accounted for through a mine closure that had run its expected life span), and 76% of these contracts are for longer than 5 years (and a third is longer than 10 years!). Just to spell this out more clearly – MRL’s mining infrastructure earnings (crushing/processing/contract mining/accommodation) are high-quality annuity-style earnings with a high return on funds employed and the commodities (market facing) business can then be viewed as cream on the cake. Tasty cream. Very tasty cream.

We didn’t have the opportunity at SOHN (but loved Emma’s pitch!) to give the insight into our own thinking and appreciation of both MIN’s track record and unique business model. After all, at the moment, the mining infrastructure business and cash/investments alone are worth more than the share price. We can only hope over time more people feel the same way as we do but don’t expect this to happen overnight. Thankfully we are very patient investors. If it takes another 13 years and 20x bags later, then so be it. Sometimes it is best just to let these compounding machines speak for themselves.”

Source/Further Reading:

https://www.tdmgrowthpartners.com/insight/sohn-bonus/

https://www.tdmgrowthpartners.com/insight/when-charlie-munger-meets-mineral-resources/

https://www.tdmgrowthpartners.com/insight/mineral-resources/

Remember - that was back in 2019, and MinRes has really accelerated their EPS (earnings), sales (revenue), cashflow, dividends, book value and net profit margin since then. All are significantly higher than when TDM wrote that piece.

This business has been a wealth-winner for their investors:

Dividends:

All divs are 100% (fully) franked, and they've been growing strongly since 2019.

For more, see my Valuation for MIN.

Disclosure: I hold MIN shares in RL, and plan to add them back in to my SM portfolio once I sell something to free up some cash.

02-Mar-2021 (6:18pm):  MIN Presentation at JP Morgan Global High Yield Conference

Mineral Resources (MIN) is a company I have held at various times and done very well out of.  They look expensive to me currently, but many, including Guarav Sodhi from Intelligent Investor and Mark Moreland from TeamInvest believe MIN are the best run and highest quality mining services contractor listed on the ASX, and own them - even ast current prices.  I wish I did, but I can't bring myself to pay these prices.

19-Nov-2020:  2020 AGM - Managing Director Presentation

Today, Friday 20-Nov-2020, Marcus Padley in his morning newsletter said:  

• Mineral Resources (MIN) - CEO says MIN is set to double in size within three years. At the company’s AGM, CEO Chris Ellison noted plans to achieve iron ore export capacity of 92m tonnes a year, saying: "We believe without any doubt that over the next 2½ to three years we are going to double the entire Mineral Resources business," "That is doubling in revenue, probably in the number of people we employ, the tonnes we shift and, more importantly, doubling the bottom line."

Some time in the second half of CY 2018:

http://www.afr.com/brand/rear-window/chris-ellisons-lithium-fantasy-exposed-at-mineral-resources-20180618-h11j06

That AFR story from June 2018 paints a reasonable bear case for MinRes (MIN).  They've now reported and they're trading a couple of dollars lower than they were a couple of months ago.

Here's the thing - I don't trust Chris Ellison like I trust the management at MND or GNG, but I do trust Ellison to do what's in his own best interests.  He's got somewhere between $300m and $350m worth of MIN shares (over 21 million shares), so most of his personal wealth is tied up in MIN.  He can afford a volatile share price, but he will make sure the MIN SP is up when he next wants to sell some shares. 

He last sold shares in November (28th to 30th) and it was 1,862,766 MIN shares at $19.82 average price, for a cool $37 million.  And that was only 8% of what Chris held at that time, so it wasn't a massive sell-down - for him, but he certainly got a good price!   He also has another 365,462 performance rights under the MIN FY16 & FY17 LTI (long term incentive) Schemes that will vest at various times over the next couple of years.  Chris will make sure they vest. 

You have to expect plenty of volatility with MIN, but you can still make money from owning them.  They can be traded or a long term hold.

18-Sep-18:  I'm not currently holding MIN shares, but I often do.

19-Mar-20:  I'm holding them again - bought back in after they reported in September 2019.