Averaging 26% a year for 17 years, what next? – Mineral Resources | Summer Series

Bryce: [00:00:13] Welcome to the Equity Mates Summer Series, proudly brought to you by CommSec, the home of investing over 12 episodes where deep diving into some of the most exciting, interesting and well known companies from around the world. Each episode we'll be unpacking one company with one expert. We'll learn from their process and understand why they like the company. My name is Bryce and as always, I'm joined by my equity buddy, Ren. How are you? 

Alec: [00:00:38] I'm very good, Bryce. I'm excited for this episode. For me, this pairing is fitting. This pairing of company and investment manager, both somewhat under the radar, but very high performing with, impressive track record. Did you guys.

Bryce: [00:00:58] Agree on the fund manager side? I would disagree on the company side. I think the company that we're speaking about today is less under the radar. Then I think it's not. I don't think it's under the radar. 

Alec: [00:01:11] Well, it's certainly not going to be under the radar now that it's had the Equity Mates spotlight shone so lately.

Bryce: [00:01:17] Absolutely.

Alec: [00:01:18] The company we are talking about is Mineral Resources. And the expert that is joining us to unpack it is Fraser Christie. He is a member of the investment team at TDM Growth Partners. 

Bryce: [00:01:29] Again, another awesome expert to join us. Love hearing from the guys at TDM Growth Partners. The Equity Mates Summer Series is proudly supported by CommSec, the home of investing. If you've just started investing or looking to build confidence, CommSec has some free tools and resources available before you even sign up to help you on your journey. Get a grip on all the investing basics with CommSec. Start investing with as little as $50 through the Commbank app. Go to commbank.com.au for more. CommSec T&Cs and other fees and charges apply. 

Alec: [00:02:00] Now, before we get into it, we need to remind you that while we are licensed, we are not aware of your personal financial circumstances and the information on this show is for education and entertainment purposes. Any advice is general. Alright Bryce, so before we speak to Fraser about Mineral Resources, let's unpack the company ourselves. And I think the starting point for me for Mineral Resources is a company that gets shorten, short term and not shorted. The longer that you talk about it, it starts as Mineral Resources as you start doing some research. You start calling it MinRes, and then once you've held it for a little while, it's just Mins. All the same company. 

Bryce: [00:02:37] Mins, yes Mins. Ticker MRL 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, is the mining services business. I think they're the fourth largest iron ore producer in the world. Daylight from the top three. And they are a major producer of lithium spodumene concentrate. 

Alec: [00:03:09] Yeah. So the company was founded in 1994 by Chris Ellison, and it listed on the ASX in 2006. From 2006 to today, it's up more than 5,000%. It's been a pretty incredible story. But it was down about a third in 2023, about 33% down.

Bryce: [00:03:30] Yes. 

Alec: [00:03:31] So things aren't good. 

Bryce: [00:03:33] Well, 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 hasn't had a 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. 

Alec: [00:03:54] Yeah. Now, I think the mining services sector as a whole deserves a little bit of attention to sort of put minerals in context, because it's a pretty unloved sector. Now, if you think about what mining services are, a mining company will own the rights to mine certain parts of land. They'll specialise in doing the damn thing, digging up the ore mining, mining services companies do all the ancillary services around the operation of a mine. So it might be in helping build the mine. You know, they might be explosives experts and stuff like that. They get contracted to do certain things. It might be an operating the mine. It might be providing, catering, catering and cleaning services. I don't think I probably will. 

Bryce: [00:04:38] No, it's just the trucks.

Alec: [00:04:42] But, what MinRes do is process a lot of the ore. So the badge pays in. Raiders of the world will dig up a lot of rock. Technical term. Yes. And then MinRes will separate the all the valuable oil from the rock. And, you know, they'll crush it and do all kinds of things to it, crush it and shake it and shift. And that's what they specialise in. But as a whole, mining services is pretty unloved because it's seen as quite cyclical. When, commodity prices are high. Mine only makes 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 by mines 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: [00:05:42] They operate a little bit differently, Ren. 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 crash. And so, you know, given that they're operating with the largest miners in the world, these aren't mines that necessarily shut down when prices fall because, you know, they are able to withstand the cyclical nature of, of the commodity price. And 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.

Alec: [00:06:38] Yeah. If you think about BHP, one of the lowest cost operators in the world, whether the iron ore price is high or low, they'll be making much.

Bryce: [00:06:47] Digging. 

Alec: [00:06:47] And they will be have a lot of long term contracts, and they're going to have a pretty consistent level of output here. And so for minerals, that means they have a pretty consistent level of processing. And that means a pretty consistent level of revenue. For like a 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 a place where we should stop. 

Bryce: [00:07:15] 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, and, 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, and create more value that way? 

Alec: [00:07:57] 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, so 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. One of Australia's most loved companies and one of Australia's least loved sectors. 

Bryce: [00:08:21] Before we speak to Fraser, if you're interested in exploring more investment opportunities, check out CommSec and the thousands of Australian and global listed companies available on the platform. Additionally, if you're looking for daily market updates, subscribe to CommSec Market Update, their daily podcast. Invest in shares on the US market from just $5 USD brokerage. Visit CommSec.com.au for more. CommSec T&Cs and other fees and charges apply. Investing overseas exposes you to additional risk. 

Alec: [00:08:50] We'll be right back with Fraser after this break. 

Bryce: [00:09:03] We're here with Fraser Christie. Fraser, welcome to Equity Mates. 

Fraser: [00:09:05] Thanks for having me.

Bryce: [00:09:06] So, Fraser, how would you describe Mineral Resources? What does it do?

Fraser: [00:09:11] MinRes 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 IPO in 2006 and is compounded at 30% per year every year. It's now at a $6 share price, employs over 7000 people, and we think can grow to multiples of its current size in the coming years. 

Alec: [00:09:54] We'll get to the four business units that you spoke to in a bit more detail, but I think, you know, you told us where it started. Give us, I guess, some of the key history over that well, 20, almost 30 year period, 50 grand credit card limit on his kitchen table to, you know, a $12 billion business. And he's a billionaire in his own right today. What are some of the key milestones on that journey? Like how how is he taking it from the kitchen table to, you know, the super yacht I guess

Fraser: [00:10:23] This is the magic of Chris Cent of Mineral Resources that still exists today. And it really comes down to two key areas. The first being the mining services capability. So Chris has always been able to build projects for lower CapEx in shorter amounts of time and then operate them at lower cost 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 so what do 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. In any iron ore I put out the other side. Let's share in the profitability in the upside. And from there, he then uses cash flow 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 Bolt 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. I'm gonna model and the conservative lithium prices 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 to the right. This has been a bumpy journey. You can imagine he's not operating BHP's iron ore assets that have the lowest cost of production, biggest tons. He's been sort of chipping off higher cost marginal production assets and running them when there's been higher commodity price environments and then having to sometimes put them 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 GFC, where everyone thought BHP and Rio would rip up all the men's contracts, and then again through the kind of 2015 iron ore price super depressed environment, the share price dropped about in the order of 70% as well. So 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: [00:13:03] You guys must be licking your lips. Isn't it down something like 30% in the last 12 months or thereabouts? 

Fraser: [00:13:07] It is, yes. Although, you know, at the $100 share price as it reached lithium, was it, I think, you know, five, six, $7,000 a tonne this volume and it's now down to 1500. So it's a kind of a whole different world in a very short period of time. 

Alec: [00:13:17] Yeah, yeah. So speaking of the 30% drawdown, it feels like at least in the retail investing space, MinRes has kind of been lumped in with a lot of the other lithium players. And they've fallen as the lithium prices have fallen this year. But as you said at the start, MinRes 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: [00:13:43] 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 MinRes. And I think most people have this misconception that mining services businesses are generally pretty crummy businesses that have low margins, they try it on low multiples. But the MinRes mining services business, we think of more as infrastructure services. So I've actually got some images here of the plants they operate. What I would say is MinRes is mining services. Business generates a very high return on capital, which generates 30% EBITDA margins. And the contracts are generally multi-year. So it's not even 1 or 2 year like ten year, 20 year type contracts in some instances. And what they're doing for BHP, 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 step foot on a mine two years ago. But I'll do my best. Yeah, they dig up the dirt and they put it through these crushers to separate out waste, which is just the dirt. And then the oil that eventually gets kind of sent by rail to the coast and port 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 BHP sites. So all of that is I mean it's massive. You can see this kind of little cars and trucks and things around it. You can see the scale of something like that operating on BHP site. I've got another image here of the processing plant that's currently being operated at Wodgina, which is one of their lithium mines. Again, you can see a little huddle of people down in the corner with we're talking football fields and football fields worth of of infrastructure. Another example is at their Mount Marion lithium site. There's just construction gear everywhere. There's processing equipment everywhere. And then the final one, and this is where means as an infrastructure service provider is really taking off, is their new iron ore project. They're actually building ports. Trans shippers like this one their own private whole roads, airstrips, mining camps, the works.

Alec: [00:15:57] 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: [00:16:07] And so when you again, from my perspective as a city boy who'd never seen a mine, I had lumped this business into it. There's just a bunch of bodies on a BHP site somewhere. I remember when I first joined TDM and I, and I was told, hey, this is one of our kind of 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. 

Alec: [00:16:37] So you mentioned there that TDM bought it at IPO in 2006, and since then it's had 270% drawdowns. So let's talk about minerals and also just about like the skill of investing more generally. In those drawdowns. Did you sell? Did you hold? Did you buy more? And how, I guess as investors that you getting comfortable in those periods where it's it's scary. 

Fraser: [00:17:04] 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, like when lithium ran in, the share price was at $100, we had a smaller position. And then in the middle of the GFC, we were buying aggressively. There's a sort of a famous war story that Tom tells that during the GFC, TDM was still a very small fund and they were aggressively buying means. 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're putting your fund at risk. They're going to lose means it's going to lose all its contracts. Like, I'm really worried for you. Like we're friends and I'm really concerned that your business is going to go under because of this. And, you know, getting a call like that would be incredibly rattling. I can't imagine what it would be like. But to the guys credit, they flew out to Perth, they spent time with Chris. I 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 these crushing contracts, mission critical to the major iron, all miners, they're not linked to price. The major miners need these tons and that the volume wasn't going anywhere. And Mins didn't lose the contracts. Nothing changed. Nothing was renegotiated. But that is a really uncomfortable feeling 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're 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 in 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. 

Alec: [00:19:37] So that's mining services. That's just one of four. So let's go through the other three business units.

Fraser: [00:19:44] 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 own 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 and between the business units. And again, these were the current iron ore mines. Means is a small player. So Western Australia will export in round numbers. 900 million tonnes of iron ore in any given year. Means delivers about 20 million tonnes of that on its own. So it's small. These are also high cost mines, so they generally operate at about 2 to 3 x the cost base of say a BHP array. 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, these assets. So there's one up in the Pilbara, one down near Kalgoorlie. Best guess, maybe $1 billion of, initial purchase price and CapEx has gone into these assets over the last five years. They've printed over $2.5 billion of EBITDA alone. And these assets will continue operating for some time. And so the value is in 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, you know, meaningfully larger than the current business. And it will be a low cost, long life iron ore mine that will exist for, you know, 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 MinRes mining services business. So there will be half $1 billion of EBITDA sent from the iron ore business to the mining services business in the form of those contracts. And those are 20, 38 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 a complex asset. It's a complex supply chain. And so no other, we don't believe in any other iron ore mine. I could have unlocked these stranded deposits and built a project like means is currently building. There's a lot of innovation out of the services business that goes into actually unlocking a mine like this. 

Bryce: [00:22:17] So that's iron ore. What about lithium? 

Fraser: [00:22:21] So the lithium assets, 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, one lithium business. But Chris was very early into the lithium game. He paid very little to acquire Wodgina, you know, five, six, seven 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 assets, 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 Means 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 benchmark set to go copy and to deliver the volumes you need. So they've had to really be at the forefront of that. So a fun fact is that Pilbara minerals pulling out all the crushing is actually done. By I mean it's mining services. So minerals are really key to the lithium industry in Western Australia. 

Alec: [00:24:05] 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 get a mining 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: [00:24:24] 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-Min Resources when he first came out to Australia, actually operated on the North West 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 white CEO, 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 tenements both in, 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 $1 billion. So he now owns 100% of everything in this 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 kind of trying to pitch the government all the value that would kind of 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 Min's business. There's a positive story for the 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. 

Bryce: [00:26:18] Chris, by the way, 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 also, as you said, creating a bit of a value chain. What are the metrics that really matter? What doesn't matter? How do you bring it all together to start forming and actually investment thesis? 

Fraser: [00:26:41] 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 kind of cost, line items was kind of the only way you could understand this business and what it was worth. And, and and kind of, you know, how we should think about our investment position. Over time, it became very clear to me that every quarter, you know, when Chris is talking to shareholders in his quarterly updates and on 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, you know, 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 today, 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, you know, there's a very clear line of sight to double, quadruple your money. 

Bryce: [00:28:09] And so the model is just a tick box. Is Chis still leading the company? Yes. No. 

Fraser: [00:28:14] Go from there. 

Alec: [00:28:14] Yeah. Well, I mean, let's talk about, I guess found, and found a risk, like, you know, everyone wants to find, you know, owners, that have skin in the game and that have built businesses and that are doing the damn thing like. And he seems to be taking all of those boxes, but he's also made over $1 billion personally. And he's, you know, in his 60s. How do you assess him, I guess, how do you assess him and him going forward? And he's going to retire anytime soon? Like, how do you think if so much of the faces is around him and the people that he's got around him, how do you monitor that? 

Fraser: [00:28:50] It's a great question, and I'm smirking a little bit because I've had the very, very good fortune of being able to make Chris, and that is, I don't know 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. Like, this is all, you know, means has won the Super Bowl. And I get to, you know, I 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 is essentially like he is constantly doing deals and evolving this business and has no signs of slowing down. And just at their recent AGM, when asked about succession and found risk in these things, said, I've got at least a decade left in me. You know, let's revisit this conversation in a decade. So, but it is something we think about in terms of like, yeah, what if you decide to go live on an island? And I think. This business in 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 sauce though that does that bolt Hill deals 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.

Alec: [00:30:16] If Chris went and lived on an island somewhere, he'd probably find a big lithium deposit there. 

Fraser: [00:30:21] Honestly, honestly, stop drilling for gas.

Bryce: [00:30:26] So you've mentioned a couple of times Fraser that you think you know, the growth opportunity over the next few years or even further out is pretty significant, the company could double what forms that bull case like what needs to happen for that to play out. What is your bull case and how are minerals? I guess maintaining or creating competitive advantage over others in its industry. 

Fraser: [00:30:48] So the double is the base case. So we are expecting the current projects that it is currently working on. So the Onslow, the big iron ore 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 I get to be kind of signed off on 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. And until I get all the approvals, until I'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 Rinehart to export out of Port Hedland, which would be another cool at 20 million tonnes of iron ore. Again, on the existing, you know, only 20 they've got today. I mentioned all the lithium stakes he 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 kind of thinking about his balance sheet and making sure he's got that all sorted out. And so he's allocating in a kind of a sensible time frame. But it's all about this pipeline of, of projects that he's got at his disposal. 

Alec: [00:32:17] So I think you know 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 MinRes. And you know, the fact that you think the base case is doubling is certainly exciting. Let's turn to the bear side of it and potentially any risks to that thesis. And as I hear you talking about what MinRes 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 like, you know, 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 have 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, you know, they struggled in these new businesses. What gives you confidence that that isn't what's going to happen here? 

Fraser: [00:33:16] Yeah, it's a really great question. And we can kind of 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, you know, 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, will Google it? He's 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. And within the services business, both from a construction perspective and an operating perspective. He himself has worked in oil and gas previously. You know, the size of plants. They're talking about building a very, very standard. We're talking about adding, you know, low single digit percentages 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, way back him as well, as long as he's not risking the company, which he's, he's not doing, you know, he's certainly, you know, he's one of the best capital allocators on the ASX over the last 15, 20 years. Like I think you back a guy like that to, to get the job done. But in terms of other risks we're 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 time thing. But if you think from the iron ore side, I mean, it's all over the headlines. Chinese property developers blowing up shadow lending system is not looking great. That's 30% of steel demand. So you know 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 that's a big risk. On the lithium side, you know, 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 a 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 double between now and three years away. And and we sort of mentioned some of the drivers of that. The new Onslow iron ore project, the associated half $1 billion in 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 what's ultimately driving the intrinsic value to compound over time. And you'll benefit from commodity prices flying around. Sometimes that'll be great. Sometimes I won't be great. But you know, you get the benefit of both sides.

Alec: [00:36:48] So there's clearly a lot of reasons to be excited. I guess the question is the share price is down a third this year. Why, you guys so much more excited than the market is? 

Fraser: [00:36:59] So if you were to kind of survey the investment banking, sell side analysts, some of their concerns that there's probably two that come to mind that the first is just around this large Onslow iron ore project that is currently building. So as I'm sure many listeners are aware, a lot of these major capital projects tend to blow and 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 focussed on. 

Alec: [00:37:31] On on, mining resources. 

Fraser: [00:37:33] Delivering that project on budget and on time. Again, you never know. But we've been out on site that Mine 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 time and on budget their entire existence. And so we feel really good that once all of the regulatory tape is cleared, Mims 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, crushers. 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 that will kind of get to the end point that they're targeting and deliver the associated kind of earnings benefits to the business. 

Alec: [00:38:33] I guess it's probably an important reminder, for all of us as investors, because we all, you know, you'll see, sell side prediction or you might say the full report and their timeframes can often be quite different, time frames as us as investors and TDM, as long term investors as well. 

Fraser: [00:38:51] Yeah. That's right. And I, I also think the other key concern is the balance sheet. But I think this is right at the moment when means was always going to have the tightest balance sheet, 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 kind of raise the hand and say you've wrecked your balance sheet. You need to, you know, you're putting the company at risk when we're right at the kind of 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 4 or $5 billion of gross leverage and there's $1 billion of cash flow 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 debt load, let alone all the earnings that have kind of come from the iron ore business in 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 kind of roll forward the clock 12 months, the business will be in a comfortable position. And and again, it gives us comfort that the CEO with the best capital allocation record on the ASX 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 on his truck when analysts are freaking out about his balance sheet. 

Alec: [00:40:22] Yeah, yeah, yeah. So I guess then as investors like, the key thing to watch is this iron ore project. And are there any, cost blow-outs or delays? Like, that's the thing that you're watching? First and foremost, every time the company updates.

Fraser: [00:40:35] 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. 

Bryce: [00:40:50] Well, Fraser, to close out, we always like to look beyond the three years and think about what this company could look like in ten years. And if Chris is still around in a decade, I'm sure there'll be many more projects in the pipeline. But how do you, after speaking with Chris and your own assumptions within the investment team, where do you think MinRes will be in ten years time? 

Fraser: [00:41:13] It's a really interesting question. And one, we do think about it a lot. And, 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 the 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 will be doing billions of dollars of EBITDA. You 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 then at that point you'll also have a gas business and who knows what else. Yeah, it's hard to get into. 

Alec: [00:42:03] A gold mine. Yeah. 

Fraser: [00:42:05] Yeah, 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 kind of incredibly successful, carry on that Mineral Resources culture, that kind of focus on kind of high returns and capital allocation. And so I think MinRes will live on in some form even decades from now. 

Bryce: [00:42:32] Fascinating company. Fascinating Founder story as well. Like I think whenever we hear people talk about minerals, it is always with Chris as the, 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: [00:42:53] Thanks, guys. Appreciate the time. 

Alec: [00:42:55] Now before we go, we want to say a huge thanks to our Summer Series partner, CommSec, the home of investing. If you're looking for more support and resources to build confidence in the market, head to that content hub. Otherwise, you can get $0 brokerage on your first ten trades for Australian markets. When you join brokerage on US stocks from just five U.S. dollars, and you can invest from as little as 50 bucks through the Commbank app. Download the Commbank app today or visit commbank.com. You contact agencies and other fees and charges apply. Investing in overseas markets exposes you to additional risk. 

Bryce: [00:43:28] Now stick with us. We only have a couple of episodes to go. Next episode, we're joined by Tracy Walberg to talk about Lowe's.