Expert: Gaurav Sodhi – The ASX-listed stock that breaks every rule of sensible investing | InvestSMART

Speaker 1: [00:00:15] Welcome to another episode of Equity Mates, a podcast that follows our journey of investing. Whether you're an absolute beginner or approaching Warren Buffett status, our aim is to help break down your barriers from beginning to dividend. My name is Bryce and as always, I'm joined by my equity buddy, Ren. How you going?

Alec: [00:00:30] Oh, I'm very good, Bryce. I am very excited for this episode. We've got an expert on the show and we're going to be talking about three stocks that we probably haven't spoken a lot about that an industry that we probably don't speak enough about. So I'm excited for this one. 

Bryce: [00:00:46] That's it. We love going deep on stocks and that's what we're going to do. It is our pleasure to welcome to the studio. Gaurav Sodhi, welcome. 

Gaurav Sodhi: [00:00:52] Morning gentlemen. Thanks for having me. 

Bryce: [00:00:54] Gaurav is the Deputy Head of research at Intelligent Investor. Intelligent Investor publishes in-depth analysis and recommendations for ASX listed companies aimed at Australian investors managing their own direct portfolio. So thank you to Invest Smart for sponsoring this episode. And before we begin, it is important to recognise that Gaurav operates under an Australian financial services licence, but that any advice he gives is general in nature. He's not aware of your personal financial circumstances. Ren and I on the other hand, do not operate under an ISO and as always, nothing we say should be taken as advice, which is why we get the experts saying so. Gaurav We always start with the story of your first investment, so if you wouldn't mind sharing, taking it, taking yourself back to that story of where you first got into the markets or whatever asset class it was, what's the story of your first investment? 

Gaurav Sodhi: [00:01:47] Well, you know, I have spent years trying to erase this memory from my mind. And and you're painting me and bringing it back up again. This is this is kind of embarrassing. But I look in my defence, I was very young, extremely green and I didn't know what I was doing, but let, let's go through it. So the first stock I ever bought was Computershare, which actually doesn't sound too wild and crazy, right? It sounds pretty sensible, but I can make it sound wild and crazy. The reason I bought this stock, you know, back in the day, we're talking about the nineties here. There was no Internet we didn't have I had an online broker, but I certainly didn't have any data feeds. I used to go through the newspaper where they listed all the stocks, and for about a week I was just looking at what was going up and and Computershare was going up and I thought, well, well, I'm onto something here. I know computers are pretty big in the future. I know the price is going up. I'm not going to buy me some of that. I don't think the stock did. It did very much at all. Look, I didn't make any money. I didn't lose any money. It was just a silly thing to do. And it took me years to really understand why it was stupid, which was the worst part of all. I'd rather make a quick loss or a quick gain and learn lessons. But when nothing happens for a long time, you forget about it and the lesson doesn't get and it is just a wasted opportunity. I prefer it if you if you jump into a stock for the wrong reason, you learn your lesson fast. And fortunately I learnt my lesson slowly. 

Alec: [00:03:18] Yeah. Well, speaking of learning lessons from that first investment to now, have you I guess developed learnt enough lessons to develop a personal investing philosophy. 

Gaurav Sodhi: [00:03:30] You're absolutely spot on there. I really believe that investing is is personal that there are lots of different ways to make money in the market. There's no one correct way. I mean, there are better ideas and others. I think that's certainly true. But ultimately, you have to first understand yourself before you can understand what kind of investor you are. And I think that's why in our youth, so many of us are such lousy investors. It's because we don't have the experience with ourselves. We don't know ourselves enough to understand what works and what doesn't. It's not that we lack financial skills, it's that we lack self-knowledge. And that's something they don't teach you at university. They don't teach you in class. But I think it's really, really important to be a successful investors, to understand what kind of person you are, what risks you can take, what your psychology is made up of, and work with that as as a broad base. 

Bryce: [00:04:24] If you've been at the intelligent investor since 2009, correct me if I'm wrong. Can you talk us through just your your journey there and perhaps some of the major lessons that you've taken from the market activity? We've been through a pretty significant bull run going from the GFC through to what started last year. This year, some of the major lessons that you've taken from that period. 

Gaurav Sodhi: [00:04:45] Yeah, intelligent investor has a really rigorous screening process. I remember coming in and doing a whole series of detailed financial tests. You know, they put a couple of blank cupboard out balance sheets in front of you. You have to give detailed insights about these companies and it takes hours and hours to do. And I systematically failed every single one of those. Tests over hours and hours. And I still to this day don't understand why they gave me the job, because I knew nothing about investing. I wanted to do investing, to be honest, boys, because I was working in economics at the time. I was a professional economist. I wanted to do something where being a contrarian was rewarded. You know, I always felt like I was a bit of an outsider at work. It was all these rules I didn't really want to adhere to. You know, you have to act a certain way. You have to behave in a certain mould, and you're only rewarded in a regular job if you fit those boundaries. You know, if you behave in that way, if you dress in that way, if you speak those words, there are rules that constrain your know how far you can go. But investing is completely different. Investing is the only and only field I can think of where you're rewarded for being the outsider, where you're encouraged to be the contrarian, where being the weird guy with the weird opinions actually counts. It actually benefits you. And I saw that and I thought, Well, I'd like to do that. I knew nothing about investing, but I'm really grateful I've got a shot and I've learnt everything I've learnt about investing has come from my my colleagues and mentors love them and I'm grateful for them. [00:06:24][98.4]

Alec: [00:06:24] So speaking about the team at Intelligent Investor, you all publish a lot of research on ASX listed companies. We have been having a look over the past few days and there's a bunch of great stuff on there. For this episode we wanted to give, I guess, a taste of some of the analysis that people can expect if they go to intelligent investor. So we've chosen three companies that you cover. Bryce and I often get criticised for speaking too much about tech and not enough about mining. So you might say that we're overcorrecting with some of the companies we've chosen today, but the three that we've chosen are Orica, the world's largest explosives maker, Washington, H Soul Pattinson, which I think you called a ready made portfolio. So we're excited to talk about that. And then Mineral Resources, a pretty incredible share market story. You just have to look at that chart going back over a decade and one that you say breaks almost every rule of sensible investors. So we're excited to get into that one as well. But let's start with Orica. I don't think a lot of people will be familiar with this company, but it is the world's largest explosives maker. Maybe give us a high level overview of who the company is, what it does.

Gaurav Sodhi: [00:07:38] Yes, you're right, Ren. It's the world's largest explosive explosives maker and explosives is a crucial part of the mining process. Before you can do anything, before we can get material out of the ground, you need to dig it up. And to do that generally involves a series of wild explosions. Now, in the old days, explosions were were pretty unstructured and they were pretty random. But these days, in modern times, in terms of modern mining explosives, these are highly regulated, detailed specialisation. Dust particles get analysed. You have to deal with noise regulation, pollution regulation. And there's an incredible amount of safety regulation involved. It's a specialist task. It's an important task. It attracts a huge amount of the risk in mining, but covers only a small amount of the cost of mining. And so it's an area where miners typically don't like to cut costs or or to take shortcuts. And that is exactly why Orica has the makings of a decent business so good. 

Bryce: [00:08:45] Orica has made it onto the watch list for intelligent investor. But we noticed in the article that you wrote it said Orica now generates less revenue than it did a decade ago and just a third of the profit margins and returns on assets have collapsed while earnings per share has been decimated. 

Alec: [00:09:06] So. 

Bryce: [00:09:08] So how does this so how does Orica find itself on your watch list. 

Gaurav Sodhi: [00:09:14] Yeah, it's had a really bad ten year period and there are two main reasons for that. I would say ten years ago Orica was squarely in the high quality business category. It generated really good returns on capital, consistent and high margins and it was an important part of that whole mining chain. And then it does what so many businesses doing so well do, which is it goes off and makes a silly acquisition. In this case, it made several of them. They tried to get into the the underground stabilisation market then and that's that's quite a niche what that when you're mining underground you need a whole series of capsules and bolts and hardware to keep in mind from collapsing. And especially when you're going deep down, you need a whole series of bits and pieces to keep the mine shafts open and safe. So they. Of of all that equipment and that that company along with another business, was folded into Orica and became a large part of Orica. And what happened was that a large part of those revenues came from underground coal mining and and we all know what happened to underground coal mining. The volumes just collapsed and that business almost worthless. So a whole bunch of capital of $1.7 billion or so was allocated towards a whole big segment that never really worked for Orica, was just a big distraction from them and led to a lot of shareholder loss. Now while that was all happening, the industry itself has been changing. You know, older investors remember big miners as big capital stakes. Mining used to be about digging as much as you could as quickly as you could. And it wasn't really about financial returns or returns on capital. Now, that changed after the big mining boom and I would say around 2011, 2012, that ten years ago that started to change. We saw a change in the board and management of the big miners, and we saw a change in their emphasis. Gone were the days where success was measured by output alone, and these miners became super disciplined in their costs and in their volumes. And the metric that mattered most was shareholder returns. And that's where we find the industry today. The industry today is nothing like it was when I first started looking at it more than a decade ago. It was run by a bunch of yahoos who were only interested in volume and building bigger and bigger businesses. It is now a properly well-run industry run by the accountants interested in financial returns. Now that's great. If you hold mining stocks, if you're a supplier to the mining industry, that means there's far less revenue in it for you. And instead of being a sieve, capturing profits from the largest of the miners, you end up being effectively a supplier to a duopoly. And being a mining services provider today is akin to supplying Coles and Woolworths. It's an invitation to generate low returns, supplying to very powerful businesses. 

Alec: [00:12:30] Yeah, right. That's fascinating. I hadn't really thought about that. If we zoom out from Oracle a little bit and we look at the capital allocation decision Orica made and what we can learn from that when analysing any business, basically it was a lost decade because they allocated capital poorly, got into a business that they, you know, that was on the decline and you know, you really told the story there as an investor looking at a company's activities, looking at the financial results, what are some of the red flags that investors probably could have seen early days, this wasn't working. How has it sort of informed your investment analysis after watching what I imagine was a slow moving train wreck? Yeah. What can we learn and what can we take when analysing other businesses? 

Gaurav Sodhi: [00:13:16] I think we have to be very aware of what the business is trying to do. Now. The idea behind the initial move into underground mining was to expand the product suite. They thought they had all these relationships with major miners. They were selling them a whole bunch of stuff. If they had more stuff to sell, they could use those relationships and increase volumes through their distribution channels. I guess it wasn't a crazy idea. I think there was some initial sense in what they were doing. I think the mistake was persisting with the idea when it was clear that it wasn't working. This didn't collapse overnight. There wasn't just one big write off over a period of ten years. It was clean within within 18 months to two years that that the acquisition was not working, that the strategy was going to fail. And instead of acknowledging then acknowledging the mistake, then stepping back and saying, okay, we got this one wrong, let's go back to doing what we were doing. They doubled down. They made another acquisition about $1,000,000,000, and they doubled down on a bad idea because they couldn't admit that they had made an error in the first place. And I see this again, and I would much rather be in a business that tries things, fails and and moves on, acknowledges a mistake and moves on rather than a business that refuses to acknowledge they're always trying to be right and double down on mistakes. And that that's the that's the glaring error. Trying something new and making a mistake is no sin. We should welcome that. Nothing is what happens if you don't try things. I have no problem with that. It's the inability to move on from mistakes. [00:14:44][88.0]

Bryce: [00:14:45] So Gaurav, I guess the question begs then if it's on the watch list, you know, you've just laid out what has occurred for Orica, but what does the future hold like? What is of interest to you and why? What's the the bull case for the next sort of decade or so? 

Gaurav Sodhi: [00:15:03] Yeah, one of the hard things is coming back to a business that has disappointed for a long time. I'm looking at it with fresh eyes and seeing it as as pregnant with potential. You know, it's easy to look at a business that failed over a long time and just say, that's a crappy business, write it off and never look at it again. I think our job is really to be more imaginative than that and try and make businesses with fresh eyes as quickly and as often as we can. And I think there is a change at Orica that board have been cleaned out. Management is new. They sold the offending business. They've acknowledged the error. And I think that's important. It's only their only words. But it's important to acknowledge that you made a mistake and and to say that you're not going to do it again. You know, I think that parent would say that to a child. And investors should say that too their companies as well, I think it's important now all through that that that ten years Orica had had continued to invest in their explosives business and they're investing in some really interesting tech. I mean, you know, I know you guys like your tech and Orica, you wouldn't think of it as being a tech business, but there is some really important technology being developed inside Orica. They have pioneered wireless explosives, which is a really big deal for the industry. Now the way explosives historically have worked is that you drill holes into sort of dozens or hundreds of sites around where you want to be, want to put something you have to close with explosives, and then someone has to manually wire up all those dots. Someone has to go around where there's live explosives and why them all up and then you detonate them afterwards. What Orica has done is it's come up with a technology that sends low frequency radio waves to wisely detonate everything and it saves having people crawling all over a live detonation site. So it's safer. They are world leaders at that. It's an important change in the industry and I think that can be the driver of future profit potential margin growth and potential revenue growth as that wireless detonation takes hold. So they fix up a fix up their capital allocation policy. There's new management in there and it's really good technology in there as well. The miners themselves, having gone through ten years of really disciplined capital allocation, I think they're finding that there's not much new rock for them to dig up. And so I think there's there's probably a case for greater capital expenditure with the miners. So there's both a structural improvement coming from Orica and maybe a cyclical improvement as well. And very few people are interested in the stock. I mean, that's a trifecta as far as I'm concerned. It's definitely on the watch list.

Bryce: [00:17:40] Wow, the trifecta. 

Alec: [00:17:41] Trifecta. Yeah. 

Bryce: [00:17:43] So let's we'll move on to the next one or the next one is Washington H Soul Pattinson The ASX ticker is so well. It is one of Australia's oldest businesses. It's a conglomerate. But how would you explain soul patts to someone who thinks it's just a chemist chain? 

Gaurav Sodhi: [00:18:00] Yeah. Look, I'm guilty as well. I once thought this was just a chemist chain and I couldn't understand why anyone would buy this. I think the most common description of this I've heard is a conglomerate. Most people think it's a mishmash of different assets, and they own big stakes in NewCo Corporation, which is a coal mine. Then in TPG, of course, the telco and they just sold a big stake in API, a chemist chain. Along with that, they owned a long and brickworks. Of course, they also had a big, big chunk of brickworks. And then there's a long line of sort of equity investment they owned as well. This is a business run by really a family, a multi-generational family, the millennials. And as you say, it's one of the oldest listed stocks on the ASX and it's fashionable to call this a conglomerate. I would actually call this a listed private equity firm and the difference between the two is a conglomerate runs a fixed asset suite and doesn't look to add and exit from its business lines. Whereas a soul patts or a listed PE firm changes, its asset base is willing to trade assets, buys and sells assets as the price is right. And we just saw them make a big gain on the sale. They're adding to their assets all the time. I think this is more of an actively managed portfolio than it is a conglomerate. And that's why I think if you're a relatively new to the share market and you don't know where to go, I'm not a huge fan of ETFs on the Australian market. I think ETFs in Australia make very little sense because the structure of our market is so concentrated now, 50% is in banks and resources, 80% is a couple of at a couple of at half a dozen stocks and you get about 80% of that market. It's not enough diversification for an ETF buyer and it's not even that high quality for an ETF. It's a singularly bad decision to buy ETFs to gain access to the Australian Market. Fine in the US, not so good here, and that's actually an alternative to that. If you want to be a low risk well-diversified investor and you don't want to do it yourself, I think so. Pets offers you a ready made portfolio that's handled with care that has a long track record. Whether. People running that portfolio own big chunks of it themselves. And this is has to be one of the most conservatively, carefully managed businesses I've come across. You know, you look at the annual report, there are no pretty pictures. It's all just printed in black and white. They're not interested in fads and fashions. They have the same process as they've had for decades. If you're a if you're an investor who doesn't want to do very much, but wants to be once they go to sleep at night, this offers you a ready made portfolio where you don't have to think too much, but everything is sensible and done thoughtfully is a certain type of investor who would be really attracted to that and if this suits them in particular. 

Alec: [00:20:50] So there's a few there's a few threads to pull on there. I think the quote, it is a singularly bad investment to buy an ETF to get access to the Australian market will ruffle some feathers. But that's not actually the threads that I want to pull on. I think the description of soap outs as a as a bit of a private equity firm makes a lot of sense. Obviously, they've got all the big players. They also are in a swim school which I learnt when doing some research. So they. 

Gaurav Sodhi: [00:21:21] Got to. Yes, that's right. 

Alec: [00:21:22] They get a wide range of business interests. But I think when you talk small parts, you have to have the coal conversation because the coal miners have been some of the best performers of the last few weeks, but the industry is seen as one that will see structural decline as demand shifts to, I guess, sorry, electricity generation shifts to other forms and coal demand falls as a result. They are in 40 or just under 40% of New Hope, which is one of Australia's largest coal miners. So a lot of, I guess your returns around soul parts will be linked to New Hope. Where's your head at? About coal. You obviously look at a lot of miners across the ASX. Where's your head at? Around coal more generally? 

Gaurav Sodhi: [00:22:09] I'm neck deep in brown coal and we've been bullish on coal. We've been bullish on coal for for about two years now. First recommendation on Whitehaven was at $0.97. We've been buying New Hope for more than probably, probably about 18 months. So we got in on the ground floor on coal and you know, you know, I understand there are people who don't want to touch it. That's the opportunity. My interest in coal wasn't because I particularly think it's a there's a strong demand case for it. In fact, you know, I'm aware that that coal demand is falling and it's likely to be continue to fall. It could drill up to dry up to zero within ten or 20 years. I am aware of all that. So the supply matters as well. And while the demand is so uncertain, the supply is is responding to that. There's been no investment in new coal supply. It's impossible for anyone to open a mine to get funding for a mine to get regulation or insurance or investors for a mine. So no matter what you do, you can't open a coal mine up both here in Australia and all over the world. That's pretty interesting. You know, you've got a situation where you can't open, you can't add to the supply and you've got a situation where people do not want to buy for non-financial reasons. You know, even if these things were making lots and lots of money, you just you just can't get buyers for the equity. And and that's why we initially went into coal and that's why we're neck deep in it now. We run a couple of listed portfolios on the ASX and and two of them have significant coal positions. For me personally, about a third of my personal portfolio is in coal. Looks like a great decision now. But I can tell you 18 months ago when when no one wanted to touch it and these things weren't looking so attractive, it was a very difficult call to make. And for me, that's something I admire about the illness. That's something I admire about soul cats. They're not just in there to follow a fashion or a fad. They're willing to back themselves, willing to stick to an idea if they think it makes sense, and that that mixture of flexibility in changing your asset base and changing your investments, but also having conviction when it's required, that's a really rare trait. I'm pleased we were able to demonstrate that with coal and intelligent invested, but it's something I really admire about the Soul Patts team as well, and they've demonstrated that for decades. 

Bryce: [00:24:47] We were lucky enough to actually interview Tom Milner, so we'll include an episode link in our shownotes. If you're interested in listening to that. I would agree it was a really insightful interview as to how they think about long term investing before we move on. Gaurav There was a quote from the article that you wrote on Soul Patts, which you titled Soul Patts. An instant portfolio. And you said as an investment company, the accountants make statutory profits meaningless and we consider cash flow, dividends and growth in asset value the key measures of success. Are you able just to elaborate on that one? 

Gaurav Sodhi: [00:25:25] It's really important to understand a little bit of accounting as an investor. This is something I know from experience. When I first started, I knew nothing about accounting and I spent years reading tons of accounting books to get to grips with it. And I find that absolutely a key advantage. So many investors don't understand accounting, and so they just trust the numbers that are presented to them. They screen for PEs. They look at net profit. They look at ROE without understanding how those things are constructed. And if you do understand that, I think it's a key advantage. And so Pat's is a good example of that. So they're their profit numbers. They print profit and and the PS there to see the are always there to see all of it is fiction. All of it is meaningless because of the way that revenue is recognised. Now we know that. So Patty's is a holds stakes in different companies. Now, depending on how large that stake is, it will recognise revenue in a different way. So for something that like there are some companies where it owns, I think it's it's more than 20% or 30%. They actually recognise the entire revenue portion of that company on their own accounts, even though they only get access to 30 or 40% of it. And there are other stakes where they own a smaller stake where they won't recognise any of the profit that comes from that company on their own accounts. They only recognise the dividends that flow as cash onto their own accounts. So the profit is a mishmash of different accounting policies and it doesn't really reflect what's happening inside the business or how much that business is worth. My advice is, is to put that profit statement aside, look at the cash that's coming in and out that helps to understand whether they can fund their dividends, which is a huge attraction of this business. It's actually I think it's got a 14 year unbroken streak of rising dividends, 14 years, the longest on the ASX. And you can also look on the balance sheet where they account for their investments and see how much of the value of those investments is reflected in the share price. And often you see that the share price trades at a discount to the value of all its investments, which is an attractive proposition. [00:27:46][140.8]

Alec: [00:27:47] Hmm. Yeah. And that logic applies to other listed investment companies and conglomerates like Berkshire is the classic one that comes to mind when you talk about and Buffett has often spoken himself about the the accounting practises and how that makes some of the some of the metrics look like that profit metric. A little bit unhelpful, I think might be the right term. We've still got one company to go, a company that you say breaks all, almost every rule of sensible investors, but it is up almost 300% in the past five years. So we're very excited to get into that one. But first, a quick outbreak so we can actually afford to invest in some of these companies ourselves. Before the break, we've been speaking about a few companies that you cover at Intelligent Investor. If people do want to see, hear and read more from Gaurav and his team at Intelligent Investor, go to Intelligent Investor dot com today. There is a 15 day free trial that you can sign up to and you can read all of these articles that we're referring to and more. We've spoken so far about Orica. The ASX ticker is our eye. That is on the watch list. Then we spoke about Washington H Soul Pattinson ASX Ticker S.O.S.. That is a hold for Gaurav and we've got a third company here. Mineral Resources ASX Ticker M I and also a hold. And Gaurav, I want to start with the quote that we've teased a couple of times in this episode. Mineral resources breaks almost every rule of sensible investors. It mines two commodities that generate no synergies. And one of them, the iron ore operation is high cost, small volume and low quality. So with such a quote. Tell us why Mineral Resources isn't a sell at a little bit about the company for those unfamiliar with it? [00:29:51][123.7]

Gaurav Sodhi: [00:29:51] Yeah, it's it's a rule breaker. And this is something I think is really important for investing generally as much as it is for minerals, mineral resources specifically. If you want to just be safe and not lose money, there are a whole bunch of rules you can follow. And I think we know what those rules are. You know, you want to be in a business with no dad, with good management. You know, we know we know what they are. Every A fund manager lists of those traits that everyone looks for. I mean, that's fine if you don't want to make errors and you want average returns. But the way to get really good returns is not to find companies that follow those rules. It's it's to find companies that break the rules. And as an investor, the way to get above average returns is not to follow those investing rules, is to understand when it's okay to break them. And so this is something we do quite often. We look for these businesses that that do things differently, that break rules. I refer to this as hustle. We've seen this. We see it all the time in little businesses. You know, sometimes you might go to a corner store and there's you know, you have a business owner there who's doing something differently or a bakery that's doing something differently. It's true on a small scale. It's true on a big scale. Minerals is a business that just does everything differently. It started life as a crushing business. Now, for those who are unfamiliar with mining, gents, I'm looking at you. And crushing is a absolutely vital part of mining. It's not just breaking down rock crushing means reducing rock to a particular particle size that will pass through a processing plant. So it's not good not just to break rock, you have to crush it to a to an average specific size and rock of all sizes and densities. Your crushing plant has to be reliable. It gets serviced all the time. So there has to be an available spare parts supply chain, and it has to be bespoke to the design and the rock that you're mining on site. So these things are incredibly important. If you're crushing plant does not work, your entire operation grinds to a halt. It has to be reliable and be bespoke to the side you're on now. Minerals started designing these plants and they used to only crush the pretty high cost crappy miners who couldn't do it themselves. In doing that, they became so good at crushing that they actually now crush everyone in the industry, including the big boys that created a supply chain which covers where they can replace parts anywhere in WA. All these remote locations, they can get parts there. So to limit downtime, they really go. They've got a whole wardrobe full of virtual wardrobe, full of designs that they can borrow off. And they've got IP that's built over decades about how to construct really complex processing plants or crushing plants. Now they've done that for years. It's a profitable business, I think. Incredible returns on capital. It's growing volumes at 20% a year for years and I think it will continue to do so. And if that's all that minerals was, you'd think, okay, that's a pretty interesting business and you'd probably still invest to be honest. But minerals is so much more than that. It combines crushing with actual ownership of mines, which I think is unique in the industry. So at the moment they own a whole bunch of iron ore mines, which as you allude to, those iron ore mines today cost about $100 a tonne to get the stuff out. The low quality, that very expensive. They've got no infrastructure or logistics behind them. Iron ore, remember, is is a logistics operation. It's not really a mining operation. Your costs are all about moving oil from one place to another, and then digging the stuff out of the ground is very cheap. It's really about moving the stuff that to. Romans how profitable you be. They have no logistics. They own a high cost, low volume, low quality iron ore mine. And then, you know, instead of sort of fixing that, they went off and bought a whole bunch of lithium mines as well. And, you know, if you if there was a business listed that had a crushing operation, a crappy iron ore operation and a lithium operation that barely made any money, you'd think, why would you want to own any of that? And you'd be well and you'd be wise to ask that question. But the key is that they're actually improving the quality of the iron ore business. And I think this has been lost on the market. They're investing billions of dollars to lift output and lift grade, and they're building their own logistics chain. And once they do that, as we've taken two or three years to do, but once they do that, they'll be the fifth largest iron ore miner in Australia. Costs will go from $100 to about $30. At the moment, they only make money when iron ore prices are sky high in a few years time. They'll make decent returns across the entire cycle and they'll have built an infrastructure chain that they can monetise from other iron ore miners as well. So the business is going to be transformed in a few years time. Now, on the lithium side, instead of just mining lithium rock, which is known as you mean, they actually have dealt themselves into the processing chain, which is where the most of most of the profit in lithium is actually made from a tonne of a raw lithium rock. If you process that and then still sell it, it's known as as a lithium hydroxide. You get ten times the revenue as you would from selling just the raw rock. Then they're building that processing plant. And again, what looks like a pretty crappy little rock mining operation is going to be a complex, high returning chemical plant by the time they're done with it. And I think altogether, this is a business that is going to be not only more profitable but much higher quality than it is today. And I think that's what's lost on the market. It's still viewed as a mining service business with a crappy iron ore mine attached to it and the option of lithium. In fact, if you look a bit further out, it's going to have a world class mining service operation with an iron ore business that can make money across the cycle and the lithium business that's going to be generating oodles of cash. The business is run by a founder that has a terrific track record, that cares about every dollar that gets spent in his business. And it's come from nowhere to be a multi-billion dollar business. You'd think you have to back these guys to succeed in their investment plans when they've done it time and time again. [00:36:12][381.0]

Alec: [00:36:12] So just on that point about leadership, you know, we set this up with mineral resources breaks or almost every rule. And I feel like and please correct me if you disagree, but I feel like when we find those rule breaking businesses, a lot of it is because of the entrepreneur, the found, the CEO or like the reason that they're able to break all these conventions and these rules is because they are just led by generational entrepreneurs that can find ways to break those rules. And Chris Ellison, the founder of Minerals and I think the managing director, still probably exemplifies that in the mining space. So tell us about the Minerals Leadership team and I guess what are the traits that you see in that team that are transferable across all the companies that you look for? Like what? What makes a great leader and and an investable leader? And do you see that in minerals this time? [00:37:12][59.5]

Gaurav Sodhi: [00:37:12] Yeah. You've just touched upon what I think is is the most important competitive advantage any business can have. And, you know, it's not network effects, it's not scale, it's not cost, it's culture. And we don't often recognise or speak about cultural leadership because it's it's hard to recognise, it's hard to pin down, it's unquantifiable and it's often impossible to replicate. But when you break down businesses again and again, this is the differentiator that matters. And that's what we spend a lot of time looking for. It's actually looking at looking for businesses that can exemplify what I've described as hustle. It's just a culture that wants to succeed that goes for that, that does everything better. It's hard to identify, hard to explain. But, you know, when you see it and it's all over minerals, I think minerals is one of the great exemplifies of hustle, one of the great exemplifies of entrepreneurial culture. When they want to when they want to do something, they just do it. You know, a couple of years ago, Minerals decided that that it was too difficult sourcing gas and and hydrocarbons to run their fleet, and they were worried about the risk of escalating fuel costs. So, you know, most companies would go off and find a hedging partner and just hedge their cost two or three years in advance. Chris Ellison set up an entirely independent gas exploration business from scratch. He thought, Right, let's go explore for our own hydrocarbons. And that way will be hedged against cost rises. And they've now stumbled across what might be the largest onshore gas discovery in way in about 30 years. You know, not not everything they touch is a success. They found that when they're dumped on the dump trucks, the trays were deteriorating really fast. And it's costing a lot of money to replace these these enormous dump drop trays. So they had this huge plan where they going to make them out of carbon fibre. They spent tens, millions, maybe hundreds of millions of dollars investing in a carbon fibre platform that could produce all these truck trays. And they found it didn't work. So they quickly just abandoned and went back to doing what they were used to do. You know, they try things. I've rarely come across a business that is so voracious for profit that they try and monetise everything they possibly can. Every time these guys build a mine, they provide every service. Every time they do a joint venture, it comes with a life of mine service contract. So every non-mining element of their operation gets serviced by minerals, and minerals owns the margin, minerals does the work. I can't think of another business in mining that operates that way, but it's the kind of mindset I'd like to see replicated across any investment I'm looking at. Well. [00:40:01][169.0]

Bryce: [00:40:02] I guess we'll all have our eyes closely watching if Chris leaves the company because that's true. That's yeah, yeah. A point to review the thesis but Greg we unfortunately have run a come close to running out of time if if you're listening in the equity mates community and interested in what the intelligent investor do do and for more analysis on Australian listed companies, head to intelligent investor dot com Todd are you they do have that 15 day free trial for you to get a sense of some of the great work that the team does. But we usually close with three final questions that we ask all of our guests. Gaurav So I ran up to you. [00:40:41][39.0]

Alec: [00:40:42] So grab the first of the final three. Do you have any books that you consider a must read? [00:40:47][5.1]

Gaurav Sodhi: [00:40:47] Oh yes. Investing is wonderful that way and that all the wisdom has been learnt before, all the lessons are there. And if you're, if you're that way inclined, you can actually learn the mistakes of all these people who've come before you and not make them yourself, which is the best way to do it. But one of the best books I've come across is one by Howard Marks called The Most Important Thing. And the joke is that, you know, it's written in a bunch of chapters and each chapter is the most important thing and it covers another, another topic. And there's about ten or 12 topics which he thinks, which he says is the most important thing. So, you know, it's not just one thing, it's a whole series of things. But the reason I really like this is not it doesn't really explain detailed financials. It doesn't go through company examples, but it really outlines better than any other book. I've seen the mindset of a successful investor, and that is someone who is dispassionate, analytical, quick to change their mind, unafraid of failure and deeply independent. Howard Marks If you get a chance to listen to him, it's just a next level and all those traits. He's one of my investing heroes. I've, I've read that book more times than I can count and I can't recommend PI highly enough. [00:42:03][75.9]

Alec: [00:42:04] The highest praise you get in investing is when Warren Buffett says you're good. And Buffett has said about Howard Box's memos that when he sees them, they're like the first thing he reads. So it's good enough for Buffet. It's definitely good enough for us. [00:42:16][11.8]

Gaurav Sodhi: [00:42:17] Definitely. [00:42:17][0.0]

Alec: [00:42:17] Sega of the second question, forget valuation, forget the share price at the moment, just purely on company fundamentals, what's the best company you've ever come across. [00:42:29][11.5]

Gaurav Sodhi: [00:42:30] That I've ever come. [00:42:30][0.8]

Alec: [00:42:31] Across? You've ever come across. [00:42:32][1.0]

Gaurav Sodhi: [00:42:32] Wow. Okay, look, I. I think I actually think the best business I have ever seen might just be Apple. Yeah, it is astonishing. It is absolut ely astonishing. My family owns Apple shares. My wife works for Apple, mind you. So I think I'm a little bit biased there, but I can't think of another business that combines, you know, technical know how with marketing nous with deep entrepreneurial hustle. Think of any any part of the business that they've touched, they've revolutionised. They've changed the way they change retail. Forget about the iPhone, I think we all know is revolutionary. They've changed retail, they've changed music, they've changed movies. They are now the world's largest watchmaker, the world's largest headphone maker. I think they're going to be a significant force in payments, in health and in augmented reality. But in one chip they've just designed is the most advanced chip ever done. And ten years ago. I knew nothing about design. Hmm. This is an impressive firm, and I think it's the best business in the world. [00:43:40][67.4]

Alec: [00:43:40] Yeah, love that. Well, we spoke on Monday about the CarPlay ecosystem that they're building as well, and then saw that quietly amassing, you know, millions of car users and the platform they're building there. And then they're allowing other developers to build apps to to do things like pay for fuel and pay for electric vehicle charging all through the Apple ecosystem. Um, it's just another platform that they're going to dominate one day anyway. We are running out of time, so let's exactly. [00:44:12][31.4]

Gaurav Sodhi: [00:44:12] Let's stop. [00:44:12][0.2]

Alec: [00:44:12] Worrying about Apple and go back to your early days as of as an investor when you were first buying those Computershare shares. What advice would you give to your younger self? [00:44:27][14.1]

Gaurav Sodhi: [00:44:27] When I was younger, I had a whole series of of check. I had a checklist full of always detailed analytical questions that I would take off. And I thought I could find a great investment by by ticking off that checklist. And it's the same checklist I had bought up over and over and over again. Everyone is looking for the same thing and there's nothing silly about that. These are sensible traits to be searching for, but if you're doing the same as everyone else, you're going to get the same results as everyone else. So my advice would be learn the rules, learn the checklist, and then learn to put it away. The more you can, you can think outside, away from that checklist mentality, the more you can think imaginatively about a business and look for the hustle in the business. I think the better you'll be as an investor, you've got to keep learning and then trust your instinct enough to put the damn checklist down. 

Bryce: [00:45:21] Love that love of the hustle vibe. 

Alec: [00:45:23] That could be the episode title. Put the damn checklist. 

Bryce: [00:45:25] Down at the dance floor. Stay well, guru. It's been it's been a pleasure. We thank you so much for your time. As I said, if if any of the equity minds community are interested in the intelligent investor, head to intelligent investor dot com direct you to check out some of the articles that they have written on ASX listed companies. I'm sure we'll touch base again. Gaurav, we've thoroughly enjoyed your insight on those three three listed companies and I know that our audience will have taken some value from that. So thank you very much, gentlemen.

Gaurav Sodhi: [00:45:53] Pleasure to be here. Thank you.

Alec: [00:45:54] And we should say before we go, a reminder that Gaurav is not aware of your personal financial circumstances and do your own research. Thanks Gaurav.