Today, the Mineral Resources Ltd (ASX: MIN) share price still bears the weight of alleged transgressions excavated through The Australian Financial Review's investigative journalism.
Shares in the mining services company are 3.8% worse for wear at $37.99 apiece. Meanwhile, the broader S&P/ASX 200 Index (ASX: XJO) is donning a deep 1.5% retreat as we approach the day's closing bell. Today's backtracking takes the two-week tumble to 26%.
After yesterday's destructive 14% fall, some investors may have thought MinRes could wipe its hands clean. However, the billionaire founder's 'lapse of judgment' regarding his personal tax reporting might be an ignition source for further shareholder pain points.
Not an ideal time for a tax scandal
Mineral Resources' balance sheet has seen better days. As of 30 June 2024, the debt stood at $4.75 billion tall, alongside only $908 million worth of cash and cash equivalents.
The company's debt-to-equity ratio is 132%, which is quite high. To paint the picture, Fortescue Ltd (ASX: FMG), BHP Group Ltd (ASX: BHP), and Rio Tinto Ltd (ASX: RIO) all have debt-to-equity ratios of less than 40%.
Lenders will often have terms in place that act as acceptable guardrails for providing the company with debt. A certain debt-to-equity ratio may trigger the lender to start taking action to prevent the loss of its capital.
According to The Australian, a Mineral Resources share price of $30 or lower might trigger existing bank covenants, which could lead to the mining business undertaking an equity raise to shore up the balance sheet and provide additional liquidity.
Why is this a problem?
Due to its low cost and leverage, debt can be useful in generating large returns for shareholders. Another bonus is that debt is not dilutive to shareholders, whereas a placement often is.
If the revelations surrounding Ellison's personal tax affairs drop an anchor on Mineral Resources' share price, shareholders could be diluted. Rumours noted in The Australian suggest an equity raise could demand up to $2 billion worth of additional shares added to the register.
Is the Mineral Resources share price a buy?
MinRes is shrouded in a bothersome cloud of controversy right now. However, not all onlookers are convinced it's a reason to skip past the $7.5 billion Western Australian mining monster.
Richard Coppleson, the director of institutional sales and trading at Bell Potter, is holding tight.
Following yesterday's collapse in MinRes shares, Coppleson stated:
[…] I like where the company will be in the next few years, and again, as a long-term shareholder since March 2020, I do not intend to sell my stock on this news. This will pass as time goes on, right now it may not look good, but the market will look forward once the dust settles.
The team at Goldman Sachs currently has a price target of $45.00 on Mineral Resources shares. This would imply a potential upside of 18%.
