The Monadelphous (ASX:MND) share price surges as Rio Tinto (ASX:RIO) overhang lifts

The Monadelphous Group Limited (ASX: MND) share price surged to a more than one-month high as the so-called “Rio Tinto Limited (ASX: RIO) discount” was unwound.

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The Monadelphous Group Limited (ASX: MND) share price surged to a more than one-month high as the so-called “Rio Tinto Limited (ASX: RIO) discount” was unwound.

The Monadelphous share price surged 5.7% to $11.40 during lunch time trade, making it the best performer on the S&P/ASX 200 Index (Index:^AXJO).

In contrast, the Beach Energy Ltd (ASX: BPT) share price is in second place with a 4.6% increase and Altium Limited (ASX: ALU) share price is third with a 3.9% gain.

Monadelphous share price trades without Rio Tinto discount

Investors got excited with the Monadelphous share price after management said it was reached an out-of-court settlement with its client Rio Tinto.

The legal threat was a big overhang on the Monadelphous share price since for nearly a year. An adverse court ruling against the engineering contractor could have brought the group to its knees.

Rio Tinto launched court proceedings against Monadelphous in August last year. The mining giant was claiming $493 million in damages during a fire at its iron ore processing facility at Cape Lambert.

Large liability that’s hard to price

Rio Tinto blamed Monadelphous for the fire, which happened during a maintenance shutdown that was managed by Monadelphous.

While claims tend to be exaggerated ahead of a court battle, Monadelphous would have been in deep trouble even if Rio Tinto won half of what it wanted.

After all, the contactor’s FY20 earnings before interest, tax, depreciation and amortisation (EBITDA) only amounted to around $90 million.

Monadelphous’ settlement provides more than one tailwind

While Monadelphous wouldn’t say how much it had to pay to keep Rio Tinto at bay, it did say that the settlement is covered by the proceeds of insurance.

Both parties now consider the matter resolved.

That’s good news. But what’s also a big positive is that Monadelphous appears to have managed to keep its working relationship with Rio Tinto.

“Monadelphous highly values its long-term business relationship with Rio Tinto,” said the contractor in its ASX statement.

“[Monadelphous] is pleased that this matter has been resolved amicably, and is looking forward to continuing to work closely with this very important customer into the future.”

Is the Monadelphous share price about to re-rate?

I won’t be surprised to see the Monadelphous share price run higher from here. The ASX share has underperformed the market over the past year as it’s barely above breakeven.

In contrast, ASX miners have soared. The Fortescue Metals Group Limited (ASX: FMG) share price surged 82% over the period, while the BHP Group Ltd (ASX: BHP) share price added 51% and Rio Tinto increased by 31%.

There are worries that ASX mining shares are starting to look fully valued. This means laggards that are exposed to high-flying commodity prices could be next to fire up.

Monadelphous share holders like myself will be keeping our fingers crossed!

Brendon Lau owns shares of Beach Energy Limited, BHP Billiton Limited, Monadelphous Group Limited and Rio Tinto Ltd. Connect with me on Twitter @brenlau.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Altium. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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