Minerals Resources is expanding its mining operations, but still has mining services at its heart.
SHAREHOLDERS in Perth-based mining and mine services group Mineral Resources have become accustomed to good news from the company. With the group in the box seat to secure some key upcoming contracts and with the company’s in-house iron ore operation taking shape, that flow of good news looks set to continue.
In the five years since its July 2006 ASX listing, Mineral Resources has established itself as one of the market’s stand-out growth stories. Having debuted on the ASX after an initial public offering at 90 cents a share, Mineral Resources is now trading at more than $11 a share, generating a huge profit for both its shareholders and its founders.
Those who punted $10,000 on the Mineral Resources IPO and held their shares would now be sitting on a stake worth more $125,000. For company founder Chris Ellison, who is Mineral Resources’ largest shareholder with an 18 per cent stake, the performance has delivered him a $340 million fortune and the ability to complete one of Australia’s most expensive property deals, the $57.5 million purchase of Angela Bennett’s sprawling Mosman Park mansion.
Investors have good reason to believe that the Mineral Resources growth story will continue.
The company recently won the contract for a new 25 million tonne per annum crushing plant at Fortescue Metals Group’s Christmas Creek mine in the Pilbara. Mineral Resources is already operating a 19mtpa crusher at the project, developed ahead of schedule at a cost of more than $250 million, and the second crushing contract is expected to be even more valuable. Given its good performance on the first crusher, it is a highly likely candidate for the second.
Beyond that, the company is also considered to be a leading candidate to pick up more work when Rio Tinto decides to expand the Nammuldi iron ore operation.
Gina Rhinehart’s Hancock Prospecting is also likely to be a source of work, with Hancock having already started the port dredging to support a 55mtpa iron ore mine.
Hancock has close ties to Mineral Resources, including a shareholding, options, a board representative and a project joint venture, which suggests Mineral Resources should get a good look-in if and when Hancock decides to proceed with the new project.
Arguably more importantly, however, is the company’s Carina iron ore project in the Yilgarn region – acquired through a takeover of Polaris Metals two years ago – which is looking increasingly certain to be developed.
Mineral Resources has finally secured the port access at Kwinana that it needed, clearing the way for the initial 4.4mtpa project to go ahead.
Executive chairman and managing director Peter Wade said branching out into mining in its own right after 20 years in the contracting business was the next logical step in the company’s evolution.
“Because we showed we could add value to clients, we knew if we had the right tenements and deposits we could do the mining ourselves and gain greater rewards by moving up the food chain,” Mr Wade told WA Business News.
Mineral Resources’ iron ore clients won’t be fazed by the company’s entry into iron ore, given the comparatively small volumes it will be mining. In addition, Mr Wade believes Mineral Resources will be a better contractor for having a deeper understanding of the broader mining business.
“In my mind it’s a very appropriate way to grow. We have the particular skills to bring on production capacity very quickly and very economically,” he said.
“Most contractors are loath to step outside their area of expertise, but the people in our company are skilled in all facets of the business so it was a natural progression to make.”
Austock Securities analyst Heath Andrews believes Carina can be a very good earner for Mineral Resources.
At 4.4mtpa, Mr Andrews believes the project can generate more than $300 million a year in earnings before interest, taxation, depreciation and amortisation – a 140 per cent increase on his forecast 2011 EBITDA for the entire group.
“The Carina project alone can more than double Mineral Resources’ profitability – it is the biggest single project for [the company] to date,” Mr Andrews said.
“Considering they acquired Polaris for $140 million in January 2010, it is testament to [Mineral Resources’] foresight.”
Mineral Resources has designs on ultimately taking Carina to 8mtpa.
Despite the growing prominence of mining within the business – Mineral Resources already mines manganese in the Pilbara and has a joint venture with Reed Resources at the proposed Mt Marion lithium development – Mr Wade said the company still had mining services at its heart.
“We think we’ve got the best skills set in Australia and maybe even the world when it comes to contract crushing,” he said.
The company, Mr Wade said, had no large-scale competitors in the crushing business, with its only rivals being the mining companies themselves. To win business, Mineral Resources must prove it can build the facilities cheaper and more efficiently than the project owners themselves.
“To deal with blue chip companies you need a proven track record, a strong balance sheet, and sufficient financial capacity to undertake work and achieve the outcomes they want,” Mr Wade said.
With the directors having spent 20 years building up the business and its reputation, Mr Wade and his colleagues have no intention at present of entertaining the procession of investment bankers with ideas about splitting up Mineral Resources.
While spinning-off the mining arm could potentially realise better valuations for both businesses, and would help end the confusion over whether Mineral Resources is a mining stock or an industrial stock, Mr Wade said the company was happy with its current structure.
“At some stage in the future when value is being properly realised for shareholders, it may be more appropriate to separate. But that time is not now,” he said.
For now, there are too many growth projects – both in mining and contracting – that need management’s attention.
Having already doubled the company’s workforce in the past 15 months to almost 800 people, Mr Wade expects to see those numbers grow to around 1,200 in the coming two years.
“Australia has always been beset by a lack of skilled personnel over many years and the resources sector in particular has been so volatile, there’s been many peaks and troughs,” he said.
“The last couple of years the skills situation has worsened and it’s definitely getting harder and harder.”
That said, being able to point to the company’s share price graph makes Mr Wade’s recruitment task that much easier.
