No-moat Mineral Resources MIN, or MinRes, maintained all fiscal 2025 volume and cost guidance with the release of first-quarter fiscal 2025 results. And it says it has made significant progress on plans to reduce operating costs and strengthen its balance sheet. With $4.4 billion in net debt, gearing elevated at 124%, and net debt/EBITDA at 4.2 at end-June 2024, bolstering the finances while lithium prices are so low is a priority.

We previously expressed concerns around the level of gearing, only partially assuaged by there being no significant debt maturities prior to 2027 and drawn debt comprising entirely of US dollar bonds that have no financial maintenance covenants. The good news on this front is that MinRes has now completed the sale of a 49% interest in the Onslow Iron haul road for $1.3 billion and has received the $1.1 billion upfront cash consideration. Further, it has agreed to sell two oil and gas exploration permits and 50% of its remaining petroleum assets to Hancock Prospecting for $1.1 billion. Upfront cash consideration of $804 million is expected by end-2024, with the balance due during fiscal 2025 subject to certain resource thresholds being met.

We increase our fair value estimate by 3% to $64. The sale of the petroleum interests nets more than we’d ascribed. While this only somewhat eases balance sheet concerns given considerable spending planned for Onslow iron and weak lithium prices, it’s certainly helpful. The market appreciated the news, with MinRes shares up as much as 18% at the time of writing. The shares had been flagging given controversy around payments made to MinRes’ founder and Managing Director Chris Ellison over 15 years ago related to pre-2006 IPO sales contracts. We see limited material impact for MinRes, given this is effectively ancient history.

MinRes remains materially undervalued. However, investors need to consider our unchanged High fair value Uncertainty Rating.

Business strategy and outlook

Mineral Resources grew significantly following listing on the Australian Securities Exchange in 2006. Demand for crushing and screening services grew strongly with iron ore output from the major Western Australian iron ore miners. Cost inflation encouraged large mining companies to outsource capital-intensive, lower-returning processes. Mineral Resources also rapidly expanded its own iron ore mining business, though lacking the integrated rail and port infrastructure of major competitors and at a competitive disadvantage. More recent diversification into lithium production at Mt Marion and the Wodgina mine delivered earnings momentum.

The financial record to now is impressive. Mineral Resources has diversified its earnings streams and improved financial disclosure. In fiscal 2010, the company was a mining service provider and minerals producer as now. But disclosure extended to just iron ore production tonnage, and segment earnings. Mining services and processing contributed 96% of group EBIT. Step forward, and Mineral Resources had materially improved its level of financial disclosure; the greater depth of clients and number of project sites also reduces risk. We think the business model is demonstrably maintainable. The volume-linked crushing and screening business should be somewhat more resilient to commodity price weakness.

Mineral Resources' mining services business builds, owns, and operates crushing and screening plants on behalf of mining customers. Despite contributing only 40% of group EBIT, mining services is core. Twelve 5-15 million metric ton per year crushing and screening plants are owned and operated on 12 sites. Clients substantially include the largest mining companies, and contract books have been renewed over time, leading to volume growth. Power is supplied by mining companies, and margins are comparatively stable. Bolstering growth in the core business centered on mining services around Australian bulk commodities, Mineral Resources will selectively own and develop its own mining operations, with the aim of subsequent sell-down while retaining core processing and screening rights.

Uncertainty rating

We ascribe a High Morningstar Uncertainty Rating to Mineral Resources. Its earnings depend on volatile lithium and iron ore prices, both directly via sales and indirectly via the provision of services to lithium and iron ore mining companies. Its own iron ore production is high cost and highly leveraged to the iron ore price, which we expect to be less favorable in future in contrast to recent boom prices. The crushing services business is less sensitive to commodity price movements in the short term, but weaker prices could reduce demand for services in the longer term and could see mining companies look to share margin pain with contractors such as Mineral Resources. The iron ore crushing business also faces the risk that lower capital costs could encourage mining customers to insource services.

Material environmental, social, and governance exposures create additional risk for investors in mining services businesses like Mineral Resources. These ESG risks are based largely on industry risks that are already incorporated into our base-case analysis. We incorporate a 13.5% cost of equity assumption in our discounted cash flow-based fair value estimate.

The most significant ESG risks relate to resource use and emissions, effluent, and waste. As a miner, Mineral Resources’ exposure to resource use issues is unsurprisingly high. And the use of excavators, explosives, drills and other heavy machinery at mine sites produces SOx, NOx, dust, particulate matter, noise and vibrations, not to mention carbon emissions. While exposure is high, it is similar to the subindustry exposure more generally.

Mineral Resources also wears risk with regard to community relations and corporate governance. The significant environmental and economic impacts of mines and mine development generates significant community scrutiny which must be navigated with care. The quality and integrity of Mineral Resources’ board and management and its remuneration systems are governance areas of focus.

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Terms used in this article

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Uncertainty Rating: Morningstar’s Uncertainty Rating is designed to capture the range of potential outcomes for a company. An investor can think of this as the underlying risk of the business. For higher risk businesses with wider ranges of potential outcomes an investor should consider a larger margin of safety or difference between the estimate of what a share is worth and how much an investor pays. This rating is used to assign the margin of safety required before investing, which in turn explicitly drives our stock star rating system. The Uncertainty Rating is aimed at identifying the confidence we should have in assigning a fair value estimate for a stock. Read more about business risk and margin of safety here.

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.