Mineral Resources: Unearthing Value - [Business Breakdowns, EP.172]

0:03This is Business Breakdowns. Business Breakdowns is a series of conversations with investors and operators diving deep into a single business. For each business, we explore its history, its business model, its competitive advantages, and what makes it tick. We believe every business has lessons and secrets that investors and operators can learn from, and we are here to bring them to you. To find more episodes of Breakdowns, check out joincollossus .com. All opinions expressed by hosts and podcast guests are sole -either -own opinions. Hosts, podcast guests, their employers, or affiliates, may maintain positions in the securities discussed in this podcast.

0:45This podcast is for informational purposes only, and should not be relied upon as a basis for investment decisions. Welcome back to Business Breakdowns. Today we are covering mineral resources. Even if you've had some bad experiences investing commodities, I would not skip over this one so quickly. Frazier Christie, investor at TDM Growth Partners. Join me to talk about how Minrez has taken a different approach to the historically cyclical boom bust industry. We walk through the increasingly vertical integration of mineral resources business. We discuss what powers it in the unique infrastructure services crown jewel asset.

1:28And we get into some of the thoughtful capital allocation that has taken place for this history. It's a very fun business with a very fun founder who still remains a key player, a key operator in the space. Please enjoy this breakdown of mineral resources. Fraser, I am excited to have you here. We're going abroad again on business breakdowns to your local lands and covering mineral resources. This is a business that I knew nothing about. There's something to be learned just from the name of it, but I'm hoping you can give us just a 90 second introduction to who mineral resources is and what they do.

2:09Yeah, sure. Thanks, Matt. Really appreciate your time on a huge fan of the show. So I'm really excited to be here. I'm also a huge fan of your episodes of Lesson Own Businesses. I know nothing about. And so we thought we'd come on the show and share one of our absolute favorites down here from Australia. So Mineral Resources is a founder -led, diversified infrastructure and mining business. Now, before I scare off your listeners by using the word mining, there are two things I would share. The first is mineral resources has been one of the best performing stocks of any business listed anywhere over the last 18 years.

2:44Since IPO, it's been able to deliver a total shareholder return of 28 % per year compounded. The second thing I would add is that Chris Ellison, the founder and still CEO today, is adamant on earnings calls that they are just getting started and while they may have a $12 billion market cap today, they can grow to many, many multiples of their current size. In terms of specifically what the business does, I think it's best if we divide the business into two segments. This is slightly different to how they report it, but I think best for this conversation. The first segment is the infrastructure business.

3:20We can refer to it as infricot and infricot is the heartbeat of mineral resources. This is where the business was founded. Inferico builds, owns and operates infrastructure for the mining part of the business, but also for third -party major miners like BHP and Rio Tinto. The Inferico business is charging a fixed fee on volumes and so is not in any way exposed to commodity prices. It's very long -life high -value earnings with high -90s gross retention. I would argue it is as good if not better than the enterprise software business investors covered today. The second part of the business is the mining business.

3:59We refer to this as mining cope. This is probably the higher profile part of mineral resource, but its core purpose is to own stakes between 15 % and 100 % in a range of mining assets that are then operated by InfraCo. It currently operates in lithium, iron ore and natural gas. I like that you're coming out hot in terms of the quality of that InfraCo that I appreciate that in terms of giving us a sense of the crown jewel here of this business. I want to touch on Chris Ellison, the founder first. You mentioned it's still owned and operated by Chris. I did do some digging just in terms of his background and he has quite an entrepreneurial story.

4:39Can you share just a bit about how you would categorize him as part of this business, his own journey and how his DNA is basically injected into what Min Res does? Chris and Minerez are kind of one in the same and he permeates the culture of the business. For any of your listeners that are bored with listening to regular earnings calls with corporate executives, I would strongly encourage them to go listen to any of the historical earnings calls with Chris. He is a true entrepreneur at heart and is extremely passionate about his business. Chris grew up in New Zealand and dropped out of high school at 15 to go work on a farm.

5:19And his dream was to one day own a farm that he worked on. But he knew he couldn't make enough money in just working on a farm in New Zealand to achieve this dream. And he heard over in Australia, you could make good money in mining. Wasn't even 20 yet. Him and a mate jumped on a plane over to Sydney and road tripped up and down the East Coast trying to find work. Obviously they had no qualifications, but he eventually ended up as a crane operator. and many years later founded Minerary Resources in 1992 with $10 ,000 in a bank account and a $50 ,000 under on credit card. From those very humble beginnings, Chris has transformed Minerary Resources into the $12 billion market cap business it is today and he still owns about 12 % of the company.

6:06And I would say there's been a very long journey of the business and its quality over that time. So initially, Chris would convince miners to let him crush and process waste iron or essentially on their mines in very small tonnages. So 1, 2 million tons of iron or at a time. Today, Minerary Resources processes hundreds of millions of tons of the best rock for some of the biggest miners in the world and has these very long -term contracts in place. So a stat is that over 75 % of their contracts will be over five years in length within the next couple of years And those contracts typically renew at 95 % plus retention rates So Chris is this incredible founder that has taken a very very small humble start and Transformed into one of Australia's biggest businesses Yeah, it was clear in the research that I did he had this entrepreneurial spirit that got him in the door in ways that you would never expect.

7:07Literally barging his way into the back door and that seems to have continued on. And then this risk taking DNA in the sense that he was willing to go out in the zone and find a way and figure it out. Getting into what he has built from a business sense. Can you give some sense of the market overview? I think for the US, we're far away from some of the mining operations or what's going on. Mining here is a lot different than what's going on with mining in Australia. So to the extent that you can cover what is happening with the mining operations, any type of market overview and how that plays into their business would be a useful way to paint the picture.

7:47I'll sort of maybe dive into both parts of the business because there's a very symbiotic relationship between the two, but mining co will deliver about $2 billion in annual labor dough within the next few years and it covers mining assets across lithium, ion, or end energy and it's all based in Western Australia. In terms of the lithium business, Minrez operates three of the largest and low -cost lithium hard rock mines in the world. All of the output is essentially sent up to China into the battery supply chain and those assets are owned some in partnership with other major miners such as Albumile and Gang thing.

8:25In terms of the iron ore business, this has historically been a very small, high -cost mining business that represents 2 % of Australia's iron ore output, but the iron ore assets within Minres are undergoing a large transformation to now become a very large low -cost mine, and we can talk a little bit more about that transformation later. Minres also has this fledgling energy business and are one of the largest onshore oil and gas acreage holders in Western Australia, and they're in the process of getting the government in provils in place to build a sizeable natural gas business. In terms of the InfraCo side, the InfraCo business will deliver about a billion dollars annually but, though, within the next few years, and it covers all of the large scale infrastructure that you would need on a mind site and to get or to port and export it into global markets.

9:16So I think things like ports, airports, roads, and crushing and handling infrastructure. The key of InfraCo might actually surprise your listeners. Infrico has a construction capability, so all the infrastructure is designed and built in -house. The construction business doesn't generate any revenue directly, but it accounts for over a third of minres employees. Because there's no one off revenue in the business. The construction capability is only to build this infrastructure on mining cosites and on third -party sites that they can then charge recurring fees on over many, many years. And this internal capability, this construction capability, allows minres to deliver projects at half the time and a third of the capital intensity verse peers that need to outsource design and construction to third parties.

10:05So you can kind of see that the idea of mining co is to go own stakes in mines that it can then pass these construction projects over to Infrico to then build infrastructure that that I can clip the ticket on all the volumes of the many, many years going forward. Paying's a really helpful picture in terms of how they would work with a single site and potentially get all of the business units involved. Just to put a bow on the commodities themselves, lithium, iron ore, natural gas. Again, coming from the US, oftentimes I think of commodities as having these very cyclical tendencies. You're mentioning that there's long duration and there's no one -off revenue payments, which is gonna look very different than the oil or natural gas sector would look here with some of the services provided.

10:53Can you just get into a little bit more about how much cyclicality there actually is in those industries and how they're able to presumably not see that cyclicality and their actual financial results? To be clear on the infracur side, there's no cyclicality in the earnings. It's all fixed dollars on volume. So that is the pace that is very high quality and typically trades at very high infrastructure like multiples. The mining co -site is absolutely exposed to commodity prices. And so how we think about these commodity businesses is for each individual commodity there is a cost curve and it's important to understand where you sit on that cost curve.

11:31And so for all three of mining co -s, core asset classes of lithium ion or and energy, they are in the lower end of the cost curve, which means yes, the overall commodity price will fluctuate, but it would have to be at record lows and wiping out significant parts of other mining businesses supply or production for it to materially impact the ongoing operations of mining co. If I may be dive a little deeper, you've got something like lithium, which is obviously exposed to the rapid growth in battery consumption, particularly for electric vehicles, and hard rock lithium mining as a category is on the very low cost and relative to the other ways you can mine and produce lithium.

12:19On the iron ore side, iron ore is part of the steel making process so you need iron ore to make steel. Australia is by far and away the lucky country when it comes to the fact that we produce a lot of the iron ore that is sent on to global sea ball markets. And so Australia and iron ore miners and now minres the lowest cost in the world in part helped by our proximity geographically to China. And then on the natural gas side, Australia is well known of being one of the largest gas exporters in the world due to our low -cost gas supplies. So I think we're kind of up there with the US and Qatar in terms of the quality of our resources.

12:59So you can see that while yes, earnings can be volatile in a commodity's business. If you are on the low cost end of the cost curve, they're typically very high through the cycle return on invested capital businesses and we can dive into this, but one of our key lessons as non -commodities investors, we typically are more kind of software growth investors, is that through the cycle return on capital is very important to focus on not just predictability of earnings. In terms of what these projects look like, particularly from the commodity side of the equation, whether it's a mining site, however you would categorize that side of the business, how do those look from a life cycle standpoint, just general economics and how you would think on a project by project basis, how Minrez approaches this?

13:51It's probably worth doing a little case study on the current iron ore project that's ramping up and is the big, high profile part of the business currently. I would firstly say that Minres is very agnostic to mineral types, so they essentially are constantly running a beauty parade as to what projects should get up next. And it's all about returning on an invested capital. And secondarily, what type of earning stream can it pass over to InfraCo? And so if we look at this new iron ore project, which is the Onslow iron ore project, or refer to, if we just break apart the mining co -earning stream and the InfraCo limiting stream, mining cove for Onzlo will require about $800 million of capital investment of CapEx and at an iron ore price lower than what it is currently today at SpotRates will deliver about a billion dollars a day.

14:41So that's annually. So that's over a 100 % return on invested capital because one is it's a very low cost source of iron ore. And the second thing is that CapEx number is very low because MinRes has this internal construction capability that I mentioned. So it's not having to outsource to EPC contractors, it's built by an all minds before. And so it can deliver these projects again half the time at third of the cost of a competitor, which means they can take on these projects that have otherwise been considered very hard to do for other miners and turn them into very profitable projects. Just on the timeline for that in terms of breaking ground when you see these mining projects, they're truly magnificent in terms of the size of what they're doing.

15:25What does that look like in terms of timeline from breaking the ground, spending that 800 million cat -backs to hitting that billion dollars of annual EBITDA? For a normal project, it would normally be, let's call it, four to seven years at best once construction starts. Minres had all of their approvals done less than a year ago. They've already delivered first door and are expected to ramp to nameplate capacity by this time next year. So let's call it two years from shovel hitting a dirt to nameplate capacity. That run rate EBITDA, I know some of these have very long life cycles. Is there a general ballpark for how long these will produce that level of, let's call it, billion dollars of EBITDA?

16:16Chris would talk about this on all mine lasting 50 plus years and having billions of tons of reserves sitting in the region. If we look to a sort of analogous mining businesses in the area, BHP and Rio Tinto, their and all businesses have been hugely cash -generative for decades and will continue to be for decades. So these types of mimes, it's all about scale economies going into these regions with huge deposits. Most miners would have to spend tens of billions of dollars in CAPEX, in rail and port and all the mining infrastructure, and that then gives you these very long life -earning strengths.

16:53So we've talked about the mining co -returns for the Youngslow project. But if we talk about Infrico, if we think about the capital investment required, it's about $1 .7 billion of CapEx to resulting about $560 million of EBITDA, which is about a 30 % plus Royk, which is obviously still extremely attractive for an infrastructure asset. However, and this is the magic of Chris Ellison as a capital allocator, he recently sold $140 million of the $560 million of EBITDA for post -tax proceeds of about $1 .2 billion. So now all of a sudden the economics are, you've only got $500 million of net capex to translate into $420 million of EBITDA.

17:38And so now all of a sudden you've got a plus 80 % return on invested capital on an infrastructure asset that has multi -decade life and is just clipping the ticket on volumes being processed. So you can sort us now see the magic of the projects that Chris goes after and they would say it's not about any one project making this business, he's been able to do this consistently over a very long period of time. So even if we pick on some other projects, Chris bought a lithium mine out of administration and receivership late last year, he's been very cagey about exactly what price he paid, but generally the market is of the belief that he will generate the purchase price in but Dara every year going forward obviously depending on the lithium price.

18:22There's many examples of this through history. So he is the capital allocation muscle combined with the operational expertise to actually build mining projects is the secret source and the competitive advantage of this business. And do those imprecco projects have similar life cycles to the mining because they are associated with those minds, you can assume similar duration of the cash flows? That's exactly right. So if you imagine Chris has literally built a highway of 150 kilometers or 100 miles, I guess, from the mine to the port and then built a new port ready to export all this volume of iron ore.

19:02And the infrastructure that has been built for this project is not only long life associated with this particular mine, but could also be used by other third parties further increasing the volume's process on the infrastructure of the time. On the sale of the stake, massively de -risking the project. But as a shareholder, you can kind of back out the multiple that was associated with that sale. And is there some point where they no longer need to do those sales? Because the balance sheet are so strong. Or do you just generally view that as a net positive from a de -risking standpoint? point. I think we're probably of the view that the businesses of sufficient size, scale, strength that maybe they don't need to do, those sorts of de -risking sales going forward, but I would say it goes to the discipline of this management team that if they can take a project from a 30 % roig to an 80 % roig, they're going to do it every single day.

20:01As I would say, they will then reinvest those proceeds into other very high return on capital projects, accelerating the flywheel and the earnings growth of the business. Obviously, over time, though, the infrastructure side of the business is more like a 10 -15 times EBITDA, multiple business. So the earnings on that side of the business are far more valuable than the four to six times EBITDA earnings on the mining coast side. And so there's this tug of war between releasing cash and being able to reinvest into growth first, holding on dearly to your highest value earnings streams. Yeah, it's very interesting.

20:36I think when I was first considering this business and those two segments, I thought to myself, there's one here that's really high quality and there's another one here that it can be very high quality, but they're different just in terms of the visibility and the cyclicality. But to your point, it does seem like that commodity business or that mining business is a feeder to to, I'm for Co. And want to get into that a little bit more. Just you mentioned they can offer some capacity to third parties. How much of Infra Co's revenues are in the future. How much do you think will be generated from projects not associated with their mining division?

21:17Is that a key priority? How much can that just be a standalone business without the mining strategic dynamics working. The external or third party business is still very, very valuable to minres and is again, it's the combined earnings, whether it's with mining co or third party, there's not really a distinction and that info business learns and innovates with both sets of customers. And so it's very important to their competitive advantage and evolution over time. The third parties will deliver about a third of that billing dollars of EBITDA, I mentioned earlier, to Infrico. And you're working on some of the biggest, best mining assets in the world at scale that helps MIMS learn to then take those learnings into the mining co -site of the business.

22:07I would also say that there are only more opportunities coming for the third party site of Infrico. What makes me say that? Well, when Minrez was smaller, it wasn't necessarily considered as highly as executing projects internally for say a BHP or a Rio. But now that Minrez is of such a scale and size and strength and is clearly showing an ability to build projects faster and cheaper than anybody else in an industry that is plagued by cost blowouts and timing overruns, the BHPs and the Rios of the world, I think more seriously considering long -term partnerships with Minres to help them grow and drive earnings into their own mining businesses which have been lower growth over the last few years.

22:56And is the competitive landscape today with BHP and Rio that they're currently doing their own version of Inferno Co internally and it's just not having the same success that Minres is having with regards to that specific division and the capabilities? I think that's probably a fair way of phrasing it. So if you take a BHPera area, they will have some sites where a lot of crushing and processing is done by mineral resources already. But you can imagine for these types of businesses, they still feel it's important to have internal capability and they've obviously invested tens of billions of dollars in their own infrastructure in rail port processing and handling.

23:35So they're kind of a hybrid model of using someone like MINS and their own internal capability. But as I mentioned, no one is debating it, no longer who is the more efficient operator. The bear trees and the reos would readily recognize and admit that minrez is far more efficient, not only on the capital and construction side, but also on the operating side. I think Chris recently mentioned that minrez is kind of in the order of 30 % more efficient on a 12 hour shift than there appears. So there's a steady march. if you want to lower your costs and drive more profitability to potentially use a partner such as Minres.

24:15Minres doesn't really have any competition, particularly in the crushing side of their infrastructure, which is the key service they offer to third parties. When you think about that dynamic where the larger incumbents are more inefficient, I can think about the US Shell evolution and where we had examples like Exxon buying a Shell business and And the cost profile went up because their safety checklists and the standards that they would have in terms of administrative work that all went into the production just was so much more inefficient than what these smaller shell players were doing at the time.

24:50Are there dynamics like that or would you point to anything else beyond that because traditionally you think of large -scale players have certainly having economies of scale when it comes to things like this. So what would you say is driving that difference in efficiency and productivity? It more comes down to the internal capability. So if you imagine these major resources companies, there's a lot of outsourcing. They're outsourcing a lot of the labor. They're outsourcing a lot of the design and construction. There's a lot of committees to approve capital plants. There's massive head offices in huge skyscrapers all around the country.

25:26Mineral resources is all about internal capability and delivering high performance outcomes. And I would say it's not so much on things like cutting corners on safety or compliance or anything like that. I think if you listen to Chris, he is very, very focused on his people and delivering the best environment for his people of any mining business anywhere in the world. We can dive into some of his innovations that don't necessarily seem obvious like some of his more infrastructure type innovations, but he is leading the charge in the global mining and resources industries. Yeah, no, I would love to hear more.

26:08I can remember him telling the story of working on a site all day and then when he was finished he had the crane operator teach him how to operate a crane for another four hours and they didn't have certain restrictions so he could work these shifts that were going on 20 plus hours for certain periods of time. So he seems to have that interest in knowing how every little piece works and I can imagine that's tying into the innovation. But we'd love to hear about some of the things that they're doing. I am sure that that is equally a driver just in terms of the efficiency and productivity. Yeah, absolutely.

26:40And it goes to their ability to attract great talent and corner the talent pocket in Western Australia. So I mean some examples historically the accommodation on site for mines were little temporary basic accommodation facilities. I think Chris would use stronger words to describe just how basic they were. At Onslow he is now creating essentially a resort with queen sized beds, kitchens, laundry facilities, large TVs, where couples can now come and stay together and work on site. There's Olympic swimming pools and tennis courts and Michel and star chefs that he now flies out to then cook Alacart menus on these mindsites Chris has started his own airline so he was Not happy with the incumbents in Australia and he realized he could optimize the flight schedules to ensure His employees were spending the maximum amount of time they could with families in their two weeks off before then flying to spend two weeks on on mine sites.

27:42And because he had his own airline, he was enabled to schedule flights to both the east coast of Australia and the west coast of Australia, thereby tapping another labor pool for talent at head office. He bought out the next door neighbors' property and he's building a childcare facility. So instead of people spending $200 a day on childcare here in Australia, the price will be set at $20. He built a gym that now has 1 ,500 members that looks like something you'd see at an NFL team's facility, they have a medical center on site that had office with everything from GPs through to psychological mental health support.

28:19His safety stats, he likes to joke, are probably better than the WA mining regulator, which is actually just desk office job people, so even though they're operating in one of the most dangerous industries in the world, they're very focused on safety. And so you kind of get a sense of the innovation in the business not only on the building big infrastructure, do it cheaper and faster than other people, but let's build an amazing environment that attracts the best talent from around the industry and around the world. It was a great list there. The one thing I want to follow up on is the airline.