MIN – Mineral Resources Limited

Mineral Resources Limited (ASX:MIN) is a leading Australian based diversified mining service, contracting, processing and commodities production company.

Since its foundation in 1993, the company has grown through strategic business development, consolidation and acquisition and now has a portfolio of market leading brands including Crushing Services International, PIHA, Process Minerals International, Polaris Metals and a controlling interest in Mesa Minerals (64% ownership).

Mineral Resources has grown to become an ASX100 listed company employing over 1,700 people with the company’s head office located in Western Australia.

Does this business have a sustainable competitive advantage?
Mineral Resources specializes in the crushing and processing of iron ore for blue chip clients such as Fortescue Metals Group and Rio Tinto. The company currently crushes and processes over 130 million tonnes of iron ore per annum for its clients.

Mineral Resources operates its own iron ore mines exporting over 5.5 million tonnes in 2013. The company is targeting an export volume of 8 million tonnes in 2014.

The company also provides pipeline technology and water solutions via its PIHA brand primarily servicing the growing oil and gas sectors.

What are the risks facing this business?
The biggest risk to the company’s profitability is a sustainable iron ore price.  The amount of contract work for their crushing services and the return on their own mining exports will largely be determined by the price of iron ore over the long term.

In the short to medium term, these risks are minimised with:
1. The iron ore price maintaining circa $130/tonne level over a number of months having risen to the high $140’s prior to the recent flattening out of the price for this commodity.
2. The Port Hedland Port Authority has continued to make regular new monthly throughput records (iron ore exports) during 2013 suggesting China is not slowing down as many have predicted.
3. The Aussie dollar is down 20% from its highs giving a natural 20% tail wind to the profitability of the company’s iron ore exports.

Is it run by able and trustworthy management?
Management run the business with a strong balance sheet considering the growth the business has experienced since 2006.

The company’s growth profile over the last number of years has created a situation where the company has recorded negative cash flow as cash receipts have not been able to keep up with the growth of the business.

To show the growth of the business, net profit (before abnormals) since 2007 are shown in the table below:

Year 2007 2008 2009 2010 2011 2012 2013 2014 Forecast
Net Profit ($ millions) 20 47 44 97 151 177 181 247

The company has confirmed twice now to the market (November 2013 and January 2014) that net profit for the 2014 financial year is expected to be between $247 and $252 million.

Is it trading at a bargain price?
Assuming the company can continue growing on a similar trajectory beyond 2014 that it has experienced in the previous eight years , the company is still good value on a fundamental basis.

Company Code Rank 2013 Actual Valuation Today’s Share Price Margin of Safety 2014 Forecast Valuation 2015 Forecast Valuation
Mineral Resources Limited MIN Gold 2 $11.52 $11.12 38% $17.91 $16.55

*Please note that forecast estimates of intrinsic value are subject to change on a daily/weekly basis.

Here is a weekly chart of Mineral Resources
Having bought and sold this stock a few times since 2010, our latest buy was on 9 July 2013 in the mid $8’s.  Since then, this stock has helped contribute to our performance in the second half of 2013.  We think more upside circa the $13 area is probable in the near term for Mineral Resources.

In summary, Mineral Resources is a very good business which is on track to produce another record profit in 2014.  The company has a strong balance sheet despite negative cash flow in recent years and very good relationships with a number of large mining companies.  The company has good management and growing mining revenues due to being in the ‘sweet spot’ of increasing volume, a relatively high iron ore price and a lower Australian dollar.

This article is published by Dean Mico.

Disclosure: The Edge Fund owns shares in Mineral Resources.

The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

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