Averaging 26% a Year for 17 Years, What Next? – Mineral Resources | Featured on Equity Mates Podcast

Fraser joins Equity Mates to discuss Mineral Resources - a company we have owned since its IPO in 2006.



Mins. Yes. Min ticker. MIN is an Australian mining services company. It also has businesses in iron ore, lithium and energy, but its primary business and the one that has been pumping out incredible shareholder returns over the last decade or so or two decades even is the mining services business. I think that the fourth largest iron ore producer in the world, daylight from the top three, and they’re a major producer of Lithium spot concentrate.

Ren (Alec) (04:22):

So the company was founded in 1994 by Chris Ellison and it listed on the A SX in 2006. From 2006 to today, it’s up more than 5000%. It’s been a pretty incredible story, but it was down about a third in 2023, about 33% down.

Bryce (04:43):


Ren (Alec) (04:44):

So things aren’t good. Well,

Bryce (04:47):

That’s not quite true. It has been tied quite closely to the price of Lithium given its projects in the lithium space. And Lithium didn’t have a great year in 2023, so it’s no surprises there, but I’m sure we’ll hear from Fraser that it’s a small blip in a much more bullish longer term story.

Ren (Alec) (05:07):

Yeah. Now I think the mining services sector as a whole deserves a little bit of attention to sort of put men res in context because it’s a pretty unloved sector. Now, if you think about what mining services is, a mining company will own the rights to mine certain parts of land they’ll specialise in doing the damn thing. Digging up the or mining mining services companies do all the ancillary services around the operation of a mine. So it might be in helping build the mine, there might be explosives experts and stuff like that. They get contracted to do certain things. It might be in operating the mine, it might be providing HR catering and cleaning services. I dunno, I think HR is probably inhouse. No,

Bryce (05:52):

No, it’s just the trucks.

Ren (Alec) (05:55):

But what re do is process a lot of the awe. So the BHPs and Rios of the world will dig up a lot of rock technical terms and then Mineral Resources (ASX: MIN) will separate ore the valuable ore from the rock and they’ll crush it and do all kinds of things to it, crush it and shake it and shift it. Yes,

Bryce (06:18):


Ren (Alec) (06:19):

It and that’s what they specialise in. But as a whole, mining services is pretty unloved because it’s seen as quite cyclical when the commodity prices are high. Mines that only make sense on the margins when prices are high, they get built in those times, but then as prices fall, those mines stop operating. And so mining services companies ride that cycle when things are good, more mines are being built, more mines are being serviced, they get a lot more work and then when things are bad, their work dries up. But mineral resources isn’t like a lot of these other mining services companies,

Bryce (06:55):

They operate a little bit differently, renin that they’re not so tied to the cyclical nature because their business revolves more around the throughput of the rock, not necessarily the price of the commodity. What we mean by that is they come along and build the infrastructure right next to the BHP mine or in some form of proximity and they get paid on how much rock that they put through the machine and crush. And so given that they’re operating with the largest miners in the world, these aren’t mines that necessarily shut down when prices fall because they are able to withstand the cyclical nature of the commodity price. So what Mineral resources is able to do is lock in very long-term contracts with these companies and be able to ride, I guess the cyclical nature of the commodities industry more so than other mining services companies.

Ren (Alec) (07:51):

Yeah, if you think about BHP one of the lowest cost operators in the world, whether the iron oil price is high or low, they’ll be making margin, they’ll be digging and they will have a lot of long-term contracts and they’re going to have a pretty consistent level of output each year. And so for MREs, that means they have a pretty consistent level of processing and that means a pretty consistent level of revenue for each contract and stuff like that. So that’s why they’re a little bit different to a lot of mining services companies. I think that’s the place where we should start.

Bryce (08:29):

Then what they’ve been able to do is take the incredible cash flows generated from the mining services business and start deploying that into other areas. So they’ve then gone into buying their own iron ore mines and then selling them on and then building the infrastructure and giving themselves the long-term contracts. So there’s a bit of a value chain there. And then they’re doing the same now with lithium and also looking at doing the same in energy. So taking that cash and essentially applying the same sort of concept like what other mines can we start to operate here, use our mining services business to give ourselves the contracts and create more value that

Ren (Alec) (09:10):

Way. Yeah, I think that’s probably all the context that we need to give at this point. Fraser will do a much better job than us at telling the story of Chris Ellison and what he’s built. So I think let’s get to it. Let’s talk about one of Australia’s most loved companies, at least in the professional funds management, definitely world, one of Australia’s most loved companies in one of Australia’s least loved sectors.

Fraser (11:23):

Thanks for having me.

Bryce (11:24):

So Fraser, how would you describe mineral resources? What does it do?

Fraser (11:28):

Min Res is a mining conglomerate based in Western Australia today operates across four business units. So there’s mining services, iron ore, a lithium business, and an energy business. But at its core, the heartbeat of the business is the mining services organisation. This is a business founded by a guy by the name of Chris Ellison. He’s a country boy from New Zealand. He started this business in 1992 with $10,000 and a 50 grand limit on a credit card, and today it’s a $12 billion business. It iPod in 2006 and has compounded at 30% per year every year. It’s now a $60 share price employs over 7,000 people and we think can grow to multiples of its current size in the coming years.

Ren (Alec) (12:12):

We’ll get to the four business units that you spoke to in a bit more detail, but I think you told us where it started. Give us, I guess, some of the key history over that, what 20 almost 30 year period, 50 grand credit card limit on his kitchen table to 12 billion business, and he’s a billionaire in his own right today. What are some of the key milestones on that journey? How has he taken it from the kitchen table to the super yacht? I guess

Fraser (12:40):

This is the magic of Chris and of mineral resources that still exist today. And it really comes down to two key areas. The first being the mining services capabilities. So Chris has always been able to build projects for lower CapEx in shorter amounts of time and then operate them at lower costs than anybody else in the mining industry globally. So that has given him a competitive advantage to go run projects that shouldn’t otherwise exist or would be unprofitable to everyone else in the ecosystem. And then the second piece is he’s just a brilliant capital allocator. So what I mean, what are some examples? Talking to Tom, one of our founders going right back to when we first invested in this business at IPO, one of the original deals Chris cut with BHP was to actually crush and process a pile of waste. So BHP had said, that’s waste, we don’t need that anymore.

We’ve already sort of extracted all the iron ore from it. And Chris said, let me put that through my crusher and any iron ore, I put out the other side, let’s share in the profitability in the upside. And from there he then uses cashflow from both the steady services contracts, but also some of these unique and interesting deals to then kind of parlay into the next mine he might buy for very little cost. So even today it was just announced in the last couple of months, he’s bought a lithium business down near Kalgoorlie called Bald Hill and he’s paid in the order of $260 million for that lithium mine. It was bought out of an administration process on our maths that mine will probably generate that in EBITDA every single year under conservative lithium prices. Oh my God, going forward. So those are the types of deals he’s been able to do over the years, but it hasn’t all just been kind of up and to the right. This has been a bumpy journey. You can imagine he’s not operating BHP iron ore assets that have the lowest cost of production, biggest tonnes. He’s been sort of chipping off higher cost marginal production assets and running them when there’s been high commodity price environments and then having to sometimes put ’em on care and maintenance and stop them in lower commodity price environments. So there’s been two occasions where there’s been 70% drawdowns in the share price, one being the JFC where everyone thought BHP and Rio would

Ren (Alec) (14:56):

Rip up

Fraser (14:57):

All the mins contracts and then again through the 2015 iron ore price, super depressed environment, the share price dropped about in the order of 70% as well. So it it’s been a bumpy, very volatile ride. But today as we mentioned, this is a big, very strong business that’s in the process of transforming itself into a lower cost operator across all of its business units.

Bryce (15:20):

You guys must be licking your lips, isn’t it down something like 30% last 12 months or thereabouts?

Fraser (15:25):

It is, yes. Although at the a hundred dollars share prices that reached lithium was I think five, six, $7,000 a tonne for SP Man and it’s now down at 1500. So it’s kind of a whole different world in a very short period of time.

Ren (Alec) (15:36):

So speaking of the 30% drawdown, it feels like at least in the retail investing space, Mineral Resources (ASX: MIN) has kind of been lumped in with a lot of the other lithium players and they’ve fallen as the lithium prices has fallen this year. But as you said at the start, Mineral Resources (ASX: MIN) has four business units, it’s a lot more than just a lithium play. So let’s talk about those four business units in a bit more detail. What do they do and what should we know about them?

Fraser (16:01):

Yeah, so the first one I’ll start on is the mining services business, which as I mentioned is the real core competitive advantage of Mineral Resources (ASX: MIN). And I think most people have this misconception that mining services businesses are generally pretty crummy businesses. They low margin, they trade on low multiples. But the Mineral Resources (ASX: MIN) Mining Services business we think of more as infrastructure services. So I’ve actually got some images here of the plant they operate, but what I would say is MRE Mining Services business generates very high return on capital. It generates 30% EBITDA margins and the contracts are generally multi-year. So it’s not even one or two year, like 10 year, 20 year type contracts in some instances. And what they’re doing for BHP or Rio is not sending them yellow goods or labour hire for cleaning or catering or anything like that. They’re spending their own money to build infrastructure on the BHP site that will live on BHP and Rio sites for many, many years.

And what it’s doing is crushing and processing the ore. So you go out to a mining pit in wa, I must admit I’m a city boy, I only stepped foot on a mine two years ago, but I’ll do my best. They dig up the dirt and they put it through these crushes to separate out waste, which is just the dirt and then the awe that eventually gets kind of sent by a rail to the coast and pour it up to China. And so an example of that crushing infrastructure is this big blue kit here that’s currently sitting on one of BHPs sites. Wow. So all of that is, I mean it’s massive. You can see there’s kind of little cars and trucks and things around there. You can see the scale of something like that is operating on BHP site. I’ve got another image here of the processing plant that’s currently being operated at Waner, which is one of their lithium mines. Again, you can see a little huddle of people down in the corner. We’re talking football fields and football fields worth of infrastructure. Another example is that they’re Mount Marion lithium site. There’s just construction gear everywhere, there’s processing equipment everywhere. And then the final one, and this is where Mins as an infrastructure service provider is really taking off is their new I and R project. They’re actually building ports, trans shippers like this one, their own private hall roads, airstrips mining camps, the works.

Ren (Alec) (18:15):

If people want to see these images jump onto our YouTube and you can see all four of them. It’s pretty incredible. Just massive infrastructure projects.

Fraser (18:25):

And so when you, again from my perspective as a city boy who’d never seen a mine, I had lumped this business into, there’s just a bunch of bodies on A BHP site somewhere. I remember when I first joined TDM and I was told, Hey, this is one of our key investments. And I was initially doing some work, I was just perplexed, but they are operating all across Western Australia, across mines they own and third party mines, and they are absolutely crucial to getting volume at a low cost out the door for these major miners.

Ren (Alec) (18:55):

So you mentioned there that TDM bought it at IPO in 2006 and since then it’s had two 70% drawdowns. So let’s talk about Mineral Resources (ASX: MIN) and also just about the skill of investing more generally in those drawdowns, did you sell? Did you hold buy more? And how, I guess as investors, are you getting comfortable in those periods where it’s scary?

Fraser (19:22):

It’s really hard and we’re certainly not commodities investors. We don’t have any other commodities investments, but somewhat strangely, the commodity price cycle almost suits our long-term time horizon. And we were definitely buying in those 70% drawdown moments. And so we’ve sort of flexed our position where when things run, when lithium ran and the share prize was at a hundred dollars, we had a smaller position and then in the middle of the JFC, we were buying aggressively. There’s a sort of a famous war story that Tom tells that during the J-F-C-T-D-M was still a very small fund and they were aggressively buying mins right in those weeks when basically the world was ending and an investment banker called up Tom and said, guys, I don’t think you understand what you’re doing. You, you’re putting your fund at risk, they’re mins is going to lose all its contracts.

I’m really worried for you we’re friends and I’m really concerned that your business is going to go under because of this. And getting a call like that would be incredibly rattling. I can’t imagine what it would be like. But to the guy’s credit, they flew out to Perth, they spent time with Chris, they flew up to China to see what was going on up there and they just did all of their work. And it kind of came up with everything that we’ve talked about that these crushing contracts mission critical to the major iron all miners, they’re not linked to price. The major miners need these tonnes and the volume wasn’t going anywhere and Mins didn’t lose a contract, nothing changed, nothing was renegotiated, but it’s, it’s a really uncomfortable billing in your stomach in those moments. But fortunately we’ve got it right so far. And I think part of that is also trying to be a partner to the business, showing them that you are there in those times, helping them tell their investor relations story, bouncing off ESG questions with them, helping them with their remuneration framing. And I think a benefit of being a shareholder for almost 20 years is that our knowledge of the business and the people has compounded over that period of time and that’s what gives us comfort in moments like today where the lithium price is dropping heavily or other commodity price cycles or when people are worried about balance sheet or project risk. We’ve seen this before, it’s happened all before and the business has delivered and executed extraordinarily well. And so we’ve been shareholders for 20 years and hopefully another 20. So that’s

Ren (Alec) (21:55):

Mining services, that’s just one of four. So let’s go through the other three business units.

Fraser (22:02):

Yeah, sure. I’ll start with iron ore and again, it’s key to think about the mining services business because iron ore wouldn’t exist without the mining services business. So all the iron ore mines, mins owns all of the operations, all of the infrastructure is delivered by the mining services division. So you can kind of see the cohesion across the business between the business units. And again, these were the current iron ore mines. Mins is a small player, so Western Australia will export in round numbers 900 million tonnes of iron ore in any given year. Mins delivers about 20 million tonnes of that on its own, so it’s small. These are also high cost mines. So they generally operated about two to three X the cost base of say A BHP or a Rio. And so you would look at that and say, well, maybe this isn’t a particularly interesting asset.

But keep in mind Chris paid very, very little money for these assets. So there’s one up in the Pilbara, one down near Kalgoorlie, best guess, maybe a billion dollars of initial purchase pricing. CapEx has gone into these assets over the last five years. They’ve printed over two and a half billion dollars of EBITDA alone and these assets will continue operating for some time. And so the value is in the journey and in the capital allocation, not so much in the, are these the best iron ore assets that exist out there. Now the really exciting thing about the iron ore business is it’s undergoing a huge transformation. So Chris is building what will be one of the largest iron ore projects built in a very long time in Western Australia that will produce about 35 million tonnes of iron ore, so meaningfully larger than the current business and it will be a low cost long life iron mine that will exist for 30 plus years.

But the best part is all of, as I mentioned, all of the infrastructure, all of the mining services will be performed by the res mining services business. So there’ll be half a billion dollars of EBITDA sent from the iron ore business to the mining services business in the form of those contracts. And those are 20, 30 year contracts. It’s infrastructure, it’s the trans shippers, it’s port handling, it’s all really, really high quality earnings that will be sent across to the services business. And again, it’s all, it’s a complex asset, it’s a complex supply chain, and so no other, we don’t believe any other iron ore mine, it could have unlocked these stranded deposits and built a project like Mins is currently building. There’s a lot of innovation out of the services business that goes into actually unlocking a mine like this.

Bryce (24:35):

So that’s services iron ore. What about the

Fraser (24:38):

Lithium? So the lithium assets are what everyone’s been talking about over the last couple of years and has certainly been the big money maker over the last couple of years. The lithium business is different to the current iron ore business in that it has always been a low cost tier one lithium business. But Chris was very early into the lithium game. He paid very little to acquire waner 5, 6, 7 years ago and then invested ahead of the curve before there was ever any lithium price run to invest in all this infrastructure that I just mentioned earlier on the services side. And so today they own two core operating asset or 50% of two core operating assets in Western Australia. And then they’ve also been buying up stakes in a lot of junior lithium miners with a view that they’re going to create at least one but likely two processing hubs where they’ll use these disparate mines that they’ve got stakes in.

They’ll create centralised processing infrastructure that will be operated by the mining services division and they will be a key player in Western Australian lithium. Now the other thing I’d say Chris and Mins are continuously evolving and learning and lithium has been a core part of that journey. Lithium is a very abrasive rock compared to iron ore and so they’ve had to innovate around the processing to actually deliver the tonnage at the costs that they need. But that has delivered them benefits processing other companies iron ore and lithium because there is no lithium industry where there are benchmarks set to go copy and to deliver the volumes you need. So they’ve had to really bear at the forefront of that. So a fun fact is that Pilgrim minerals, PIL gang, all the crushing is actually done by MRE Mining services team. So MREs is really key to the lithium industry in Western Australia.

Ren (Alec) (26:23):

Wow. I’m getting the sense, and maybe I’m jumping ahead here, but I’m getting the sense that all roads lead back to the mining services business and there’s a lot of different ways to getting a mining services contract and sometimes that is by building the mine yourself. Before we get to that though, there is one more business unit, let’s round it out. Energy services.

Fraser (26:42):

Yes. So energy is a more recent one and today there’s no earnings from this business unit, but there is a longer history to this business unit. So Chris pre mineral resources when he first came out to Australia actually operated on the Northwest shelf in wa, which is one of the gas fields. And periodically he has tried to buy oil and gas assets within mineral resources. So he actually bid to essentially own at stake of wait seal, which is one of the gas projects in Western Australia at the minute unsuccessfully unfortunately. But he then went on a bit of a spending spree to buy up tenement both in and around Perth and further up north in western Australia. And they’ve started drilling holes and as you’d expect with Chris, they found truckloads of gas. He subsequently bought out his JV partner this year for about half a billion dollars.

So he now owns a hundred percent of everything, of all the tenements. He started buying drill rigs so that he can just start drilling everywhere through all his tenements and get a gas business up and running. The latest development is that you can imagine with everything going on in the world, LNG markets are attractive. And so Chris has decided he would like to build a thumping big gas plant in Western Australia and export a chunk of LNG up into global markets, but currently the WA government won’t actually let that happen. So there’s a bit of back and forth going on now where they’re trying to pitch the government all the value that would accrue to the state by having another major gas project up and running. We sort of see that as a kind of a key pipeline project and most importantly from an ESG perspective, it’ll help them rip diesel out of all their operations. They’ll be able to convert everything into gas, which drastically reduces their carbon footprint. So there’s a positive story both within the MIMS business, there’s a positive story for the WA state in that it will secure them really low cost gas to heat their homes and provide electricity and then of course there’s a financial incentive of trying to export some of this as well. Yeah.

Bryce (28:36):

Chris, what a weapon. So Fraser wrapping all of that up, you’ve got four business units. How do you then I guess, assess a company that has sort of distinct business units but all, as you said, creating a bit of a value chain? What are the metrics that really matter? What don’t matter? How do you bring it all together to start forming an actual investment thesis?

Fraser (28:59):

This has been a huge journey for me. I definitely started with this business thinking my thousand row Excel spreadsheet modelled mine by mine and all the intricate cost line items was the only way you could understand this business and what it was worth and how we should think about our investment position over time. It became very clear to me that every quarter when Chris is talking to shareholders in his quarterly updates, and you can read those publicly, the transcripts are all available on their website. There’s a new project, there’s something different they’re working on, they’re recutting an existing joint venture agreement. They’ve purchased stakes in some random assets that I’ve certainly never heard of being from Sydney. And so part of the investment thesis with this business is actually looking at the journey the business has been on that it has compounded at 30% a year that the return on capital has always been, call it 20 to 30% plus. And looking at Chris and his story and what he’s building and giving him a very, very high degree of probability that given everything he’s delivered date, he will deliver on at least some form of the plans that he currently has for this business. And if you believe even half of it, there’s a very clear line of sight to double quadruple your money in this business. So the model

Bryce (30:27):

Is just a tick box. Is Chris still leading the company?

Speaker 11 (30:30):

Yes. No, go from there. Yeah.

Ren (Alec) (30:33):

Well, I mean let’s talk about I guess founder and founder risk. Everyone wants to find owners that have skin in the game and that have built businesses and that are doing the damn thing and he seems to be ticking all those boxes, but he’s also made over a billion dollars personally and he’s in his sixties. How do you assess his, I guess how do you assess him and him going forward and is he going to retire anytime soon? Do you think if so much of the thesis is around him and the people that he’s got around him, how do you monitor that?

Fraser (31:08):

It’s a great question and I’m smirking a little bit because I’ve had the very, very good fortunate of being able to meet Chris and that is, I dunno about you guys with your interviews, but when we get to meet founders of these incredible businesses, for me it’s like meeting Tom Brady kind of thing. This is the Super Bowl and Mins has won the Super Bowl and I get to sit down with Chris and he is one of the most fired up energetic people you’ve ever met in your life and just has ideas for this company just coming out his ears essentially. He is constantly doing deals and evolving this business and has no signs of slowing down. And just at their recent ag GM when asked about succession and found risk and these things said, I’ve got at least a decade left in me, let’s revisit this conversation in a decade. But it is something we think about in terms of yeah, what if he decides to go live on an island? And I think this business and the projects that are already in hand, this business could easily double in the next few years just with what is in existence. Definitely Chris is the secret source though that does the bald hill deals that are just insane from a shareholder return perspective. And so he’s a key factor to why this business has been successful and why it will continue to be very successful.

Ren (Alec) (32:34):

If Chris went and lived on an island somewhere, he’d probably find a big lithium deposit there,

Fraser (32:39):

Honestly, honestly start drilling for gas.

Bryce (32:44):

So you’ve mentioned a couple of times phrases that you think the growth opportunity over the next few years or even further out is pretty significant company could double what forms that bull case, what needs to happen for that to play out? What is your bull case and how is Mineral Resources (ASX: MIN) I guess maintaining or creating competitive advantage over others in its industry?

Fraser (33:06):

So the double is the base case. So we are expecting with the current projects that it is currently working on, so the Onslow, the Big Iron and all project, I mentioned that under sort of conservative commodity price assumptions, this business should double over the next few years. The bull case for us is probably the next doubling and that’s got to do with the projects that are yet to be signed off and into construction. So we’re thinking things like the gas business and building a big gas plant in WA and potentially exporting a lot of that until they get all the approvals, until they’ve kind of signed off on construction. We kind of park something like that in the bull case. There’s another iron ore project in the Pilbara that Chris has a JV with Gina Reinhardt to export out of Port Headland, which would be another call at 20 million tonnes of iron ore again on the existing only 20 they’ve got today.

I mentioned all the lithium stakes mins has acquired over the last few months. We’re not including any of that in our base case, but again that will bring in a lot of earnings if they can create these hubs. So it’s all about this pipeline of high return on capital projects that Chris consistently has lined up and is constantly working with his management team to say, okay, what’s the next one that we’re working on? What’s the next highest return option available to us? And then thinking about his balance sheet and making sure he’s got that all sorted out. And so he’s allocating in a kind of sensible timeframe, but it’s all about this pipeline of projects that he’s got at his disposal.

Ren (Alec) (34:35):

So I think Bryce and I are listening and I’m sure a lot of people listening at home are getting quite excited about Chris in particular and the business res and the fact that you think the base case is doubling is certainly exciting. Let’s turn to the bare side of it and potentially any risks to that thesis. And as I hear you talking about what Mineral Resources (ASX: MIN) is building, it’s like they have a really core competency in mining services and then they’ve sort of extended out into the value chain and they’re doing their own iron ore mining and then they’ve gone adjacent to another mineral with lithium and it seems like they’ve had a lot of success there, but now it’s gas. There’s a lot of companies throughout history that had had a really strong competitive advantage and then they tried to extend and build an empire outside of that core competency and returns fell and they struggled in these new businesses. What gives you confidence that isn’t what’s going to happen here?

Fraser (35:34):

Yeah, it’s a really great question and we can dive into some of the other risks as well, but this one just comes down to track record. I think we’ve found people with a really strong history of high performance across both the capital allocation elements and the operational elements. I mean you’ve sort of got to back them when they are backing themselves to go into a new project and I think Chris gets asked this question and I think his response kind of flippantly was, I don’t know, we’ll figure it out and if we can’t we’ll Google it.

But in a more serious tone, Chris is incredible at attracting talent. So he’s always attracted amazing people out of organisations around the world when he’s faced with a problem that he doesn’t necessarily know the specific answer to. And so I think on the gas side, he’ll attract great people. He’s got a lot of capability within the services business, both from a construction perspective and an operating perspective. He himself has worked in oil and gas previously. The size of plants they’re talking about building are very, very standard. We’re talking about adding low single digit percents to Australia’s total exports and production of gas. And so I think he backs himself to build things like that and I think given his track record we back him as well. As long as he’s not risking the company, which he’s not doing, he certainly, he’s one of the best capital allocators on the A SX over the last 15, 20 years.

I think you back a guy like that to get the job done. But in terms of other risks we are thinking about, I mentioned the doubling in the base case, but obviously the commodity price, which we haven’t talked about is a huge driver of potential returns. We tend to think almost all our scenarios are based on just what we think is a very conservative commodity price assumption because we’re not commodities people. We’re not modelling what we think the lithium price or the iron ore price is going to do in six months, one year, three year, five year type thing. But if you think from the iron ore side, I mean it’s all over the headlines. Chinese property developers are blowing up. Shadow lending system is not looking great, that’s 30% of steel demand. So there’s a potential risk over there. Now people have been talking about that for over a decade.

The Chinese government has often stepped in with big infrastructure bills to soak up some of that steel demand, but that’s a big risk on the lithium side. Lately we’ve seen a big drop off in the lithium price as demand for electric vehicles has sort of flattened out in terms of electric vehicle share of car sales going into uneasy macro environment where the consumers are struggling with high interest rates and big mortgages, they don’t have spare cash to go buy a Tesla. So there’s definitely shorter term risks that could mean as has always happened through mineral resources history that the share price could be very, very volatile and there’s definitely downside. But on that, again that call it three year view, this business is going to be transformed basically the earnings across each division will between now and three years away. And we sort of mentioned some of the drivers of that, the new Onslow iron ore project, the associated half a billion dollars of mining services earnings over on the mining services side and then the lithium assets ramping up and expanding. And so we feel very good that if you’re going to just double the raw output of a business that’s ultimately driving the intrinsic value to compound over time and you’ll benefit from commodity prices flying around. Sometimes they’ll be great, sometimes they won’t be great, but you get the benefit of both sides.

Ren (Alec) (39:06):

So there’s clearly a lot of reasons to be excited. I guess the question is the share prices down a third this year. Why are you guys so much more excited than the market is?

Fraser (39:17):

So if you were to kind of survey the investment banking sell side analysts of their concerns, there’s probably two that come to mind. The first is just around this large onslow iron ore project. Mins is currently building. So as I’m sure many listeners are aware, a lot of these major capital projects tend to blow out in cost, blow out in time costing shareholders a lot of money and it can end pretty disastrously. And given that is such a core part of our investment thesis, we’re very focused on mineral resources delivering that project on budget and on time. Again, you never know, but we’ve been out on site that Mineral Resources hosted a site tour where a bunch of investors got to go see the current construction project. Chris has delivered these sorts of projects on time and on budget for his whole career. Mineral Resources has delivered these projects on Diamond on budget their entire existence.

And so we feel really good that once all of the regulatory tape is cleared, mins has a very strong history and track record of building these sorts of mines. This is nothing outside their core capability. It’s all been done before building airstrips roads, mines crushes, it’s all within their core competence. So look, is there a chance it slips by a few months? Sure. Is the ramp up going to take a bit longer than expected maybe. But in the scheme of a multi-year investment thesis, we feel very strongly that they’ll kind of get to the end point that they’re targeting and deliver the associated kind of earnings benefits to the business. I

Ren (Alec) (40:51):

Guess it’s probably an important reminder for all of us as investors because we all, you’ll see sell side prediction or you might say the full report and their timeframes can often be quite different to timeframes as us as investors and TDM as long-term investors as well.

Fraser (41:09):

Yeah, that’s right. And I also think the other key concern is balance sheet, but I think this is right at the moment when Mins was always going to have the tightest balance sheet. They’re deploying billions of dollars into this iron ore mine and other projects and the earnings won’t come through for another year or so. And so this was always going to be the point of max leverage. So it’s a bit harsh to raise the hand and say you’ve wrecked your balance sheet, you are putting the company at risk when we’re right at the six months before this project ramps up and as I said, delivers 500 million of EBITDA to the services side. So just on some rough maths, if there’s four or 5 billion of gross leverage and there’s a billion dollars of cashflow being spat out by the services business, which again is nothing tied to price, it’s recurring earnings, multi-year contracts, the mining services business alone could carry that kind of debt load, let alone all the earnings that are kind of come from the iron ore business and the lithium business in the coming years. So again, is this the pinch point from a balance sheet perspective? Absolutely, but again, we think if you roll forward the clock 12 months, the business will be in a comfortable position. And again, it gives us comfort that the CEO with the best capital allocation record on the as X over the last 15 years thinks he’s got so much cash up his sleeve that he’s spending hundreds of millions of dollars buying stakes in junior lithium miners. True when analysts are freaking out about his balance sheet.

Ren (Alec) (42:42):

So I guess then as investors, the key thing to watch is this iron ore project and are there any cost blowouts or delays? That’s the thing that you are watching first and foremost every time the company updates

Fraser (42:53):

Very, very, very closely, that is our number one priority. Now obviously there’s a lot going on with the lithium price and that will also impact earnings in the near term, but if we think about the intrinsic value of this business, this project is the most important thing by far and away.

Bryce (43:08):

Well Fraser to close out. We always like to look beyond the three years and think about what this company could look like in 10 years and if Chris is still around in a decade, I’m sure there’ll be many more projects on the pipeline. But how do you, after speaking with Chris and your own assumptions within the investment team, where do you think MREs will be in 10 years time?

Fraser (43:31):

It’s a really interesting question and one we do think about a lot and I think a recent change within the mineral resources, just operational structure is probably quite telling. Historically, it’s all sort of just been operated as one company and over the last couple of years Chris has actually appointed heads of each business unit and they’re now run almost independently. So you can imagine the lithium business is sort of working with the services business to price up contracts and construction and all those sorts of things as is the iron ore business. And so over time what I think you’ll have is you’ll have an infrastructure business that’ll be doing billions of dollars of ebitda. You’ll have a low cost long life iron ore business of material scale and you’ll have one of the best hard rock lithium businesses in the world and you then at that point, you’ll also have a gas business and who knows what else Chris and Vince

Ren (Alec) (44:20):

Decide to get into a gold mine

Fraser (44:23):

Honestly. So I think those independent business units will be big enough that actually I suspect you’ll start seeing them spun out into their own independent entities to go on to be incredibly successful, carry on that mineral resources culture that focus on high returns and capital allocation. And so I think Mineral Resources (ASX: MIN) will live on in some form even decades from now.

Bryce (44:50):

Fascinating company, fascinating founder story as well. I think whenever we hear people talk about Min Resids always with Chris as the sort of driver for what has been an amazing compounder over many decades. So thank you for coming in today and sharing that with us. We certainly appreciate it and always enjoy hearing from the TDM guys. Thank you very much.

Fraser (45:11):

Awesome. Thanks guys. Appreciate the time.

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