Ask the analyst: Why has MinRes fallen so far?
Mineral Resources shares are down almost 50% year to date. Mark Taylor weighs in on some of the reasons why.
Mentioned: Mineral Resources Ltd (MIN)
Welcome to the next edition of Ask the analyst, where we put your questions about ASX stocks under our coverage to our equity research team. If you have a question, please send it to [email protected] and we may feature it in a future article.
Today’s question
Today’s question comes from Greg C, a Morningstar reader and Mineral Resources (ASX: MIN) shareholder from Adelaide.
Greg’s email said the following:
“I have owned MinRes for a long time and have been through a few sell-offs. I’m not enjoying this one, though! The stock is down almost 50% this year and it has been in the headlines a lot too. Any thoughts on the main causes of the sell-off?”
For those of you less familiar with MinRes than Greg will be by this point, let’s start with a very quick overview of how it makes money.
How does MinRes make money?
MinRes is home to two very different business segments: mining services and mining.
Our MinRes analyst Mark Taylor still considers the company’s traditional mining services business to be its core. For a few years, though, earnings from these operations have played second fiddle to those from iron ore and lithium mining.
“Now that MinRes’s Onslow iron ore project has come online, I expect iron ore to be 80% of the mining segment’s revenue in 2025” says Taylor. “In 2026, I think that will fall back to two-thirds as we forecast that lithium prices can recover a bit”.
Why have MinRes shares been so weak this year?
The relative earnings contribution and different nature of these two segments account for much of what has been driving MinRes’s share price movements.
Revenue and profits from MinRes’s mining services business are tied to production levels at the company and its clients’ mines. These have some potential to vary with commodity prices, but this business has generally been steadier and more predictable than the mining segment. It has long contracts at mines that are less impacted by downcycles, and its clients have little reason to find a new supplier.
By contrast, profits in MinRes’s mining segment are highly leveraged to commodity prices. All the more because most of the mines it owns are not particularly low-cost operations. This is especially true for their iron ore mines, which sit higher on the cost curve than many peers due their low-grade ore.
Onslow’s long-life and lower cost profile will help in this regard, but MinRes is still highly reliant on favourable iron ore prices. MinRes’s lithium operations are slightly better placed but still have higher all-in costs than several assets including IGO and Albemarle’s Greenbushes mine.
Add this together and you get a company that has a bigger, growing and more leveraged portion of its earnings coming from mining. Hence MinRes generally trading far more like a mining pureplay as opposed to a mining services company that also owns mines.
The fall in lithium prices has been especially hard on MinRes shares in recent years. Iron ore prices coming off from 140 USD at the start of 2024 to around 100 USD per ton hasn’t helped either.
The Ellison effect
Most of the weakness in MinRes shares this year, then, can be accounted for by commodity prices. But more recently they have also been hit by uncertainty over the future role of its founder Chris Ellison.
Allegations of tax dodging and personal use of company funds have dogged Ellison this year and ultimately led to an announcement that he will leave MinRes within 18 months.
MinRes has never been run conventionally. So much so that Taylor admits to sometimes wondering why Ellison took it public at all. Early investors are glad he did though. The shares are up over 30x since IPO.
There is potentially some concern that Ellison’s departure and the influx of more conventional management could diminish what Taylor calls MinRes’s “phenomenal ability to pull rabbits out of hats”.
For now, though, Ellison maintains his huge ownership stake and could retain an outsized say in how the company goes about its business.
Too much debt?
On the topic of strategy, MinRes’s latest update showed a renewed focus on cutting operating costs and selling assets to raise cash.
The company confirmed that the $1.3 billion partial sale of the toll-road accessing Onslow is now complete and that Hancock Prospecting has agreed to pay $1.1 million for two oil and gas exploration permits and 50% of MinRes’s remaining petroleum assets.
The latter deal brought in more cash than Taylor had expected. And while the proceeds will make a dent in the company’s debt pile, Taylor still thinks that MinRes’s balance sheet looks overstretched at a predicted 4.0x adjusted operating profit.
While the company’s elevated level of debt is relatively new (it has often operated with little or no net debt), its strategy of developing resource operations with the aim of eventually selling down their stake and holding onto the processing rights is not. Can more asset sales be expected, then?
Taylor definitely wouldn’t rule it out. Apart from the higher quality Onslow mine, though, MinRes could find it hard find a buyer for its low-grade, higher cost iron assets. Especially if iron ore prices dip closer to our medium-term forecast of USD 90 per ton.
Plenty of value but lots of uncertainty
Our Fair Value estimate for MinRes is $64 per share or almost 70% higher than current share price levels of around $38. Mark Taylor is keen to remind investors, however, that his valuation is accompanied by an Uncertainty rating of High. This means investors should seek a significant margin of safety.
Taylor’s Fair Value estimate is split roughly even between the mining and mining services segments. Over the medium term, he expects that lithium pricing headwinds will abate and that Onslow’s lower cost iron-ore could provide a further boost to the mining segment’s profit margins.
Over the long-term, our assumption is that China’s robust demand for iron-ore moderates as its economy matures and legislators focus more on consumer spending than infrastructure investments. If this is compounded by the supply increases that we expect in coming years, iron ore prices could fall substantially below the levels seen in recent years.
It’s also worth keeping in mind that the lithium market is still in its infancy and that new mines can still move the supply/demand picture quite significantly. Until the market matures in this respect, prices could continue to be volatile and bring large swings in MinRes’s earnings. In Taylor’s view, this makes it all the more crucial to be wary of its highly leveraged balance sheet.
Mineral Resources
- Economic moat: None
- Fair Value estimate: $64 per share
- Uncertainty: High
- Star rating:★★★★
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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.
