The Mineral Resource Ltd (ASX: MIN) share price has suffered a painful decline this year. But that doesn't mean investors should think it's doom and gloom at the current valuation. One fund manager thinks it can be a recovery play.
Fund manager L1 Capital is already a shareholder in the iron ore and lithium miner, and it thinks the stock can make good returns.
L1 Capital likes to examine investments that it thinks are undervalued and have low valuations, particularly cyclical stocks that are near the bottom of their cycles.
What the fund manager thinks of the current troubles
The fund manager noted that the ASX mining share dropped 24% in October. It's down another 10% in November to date.
This drop has largely been due to investigations into an array of governance issues, which have resulted in the announcement that the Mineral Resources chair intends to step down and that the business is planning for the succession of Chris Ellison, the current CEO.
L1 has been encouraging the board to establish a "more serious corporate governance framework, oversight and disclosure protocol."
The fund manager also said it's supportive of the financial penalties that have been imposed on the CEO for those "historic" governance breaches.
But, L1 also said:
However, based on the facts currently known to us, we believe the best course of action for shareholders would be to retain Chris Ellison as CEO, with a far more rigorous corporate governance framework and oversight in place.
L1 Capital said it has been increasing its shareholding after the recent sell-off of Mineral Resources shares. It noted that shareholders who have been there for the journey while Chris Ellison has been CEO have made more than 80x their original investment, which is "one of the strongest returns of any stock in Australia over the past 20 years".
Why is L1 bullish on Mineral Resources shares?
In my view, investors should be forward-looking, so it's worth asking what L1 still sees after this troubling period for the ASX mining share.
Firstly, L1 noted that Mineral Resources recently announced the sale of its gas assets for around $800 million cash and a further $300 million if certain thresholds are met. The fund manager said this price was well above market expectations, which "helps address concerns over its balance sheet flexibility in a lower commodity price environment."
The investment team also believes the sale demonstrates the "high degree of optionality in the portfolio (particularly upside capacity in iron ore volumes over time, that we feel is under-appreciated by the market."
L1 also explained why the market may be underappreciating Mineral Resources shares because of the operations for its two key commodities:
We continue to believe that each of Mineral Resources' core segments should see material improvement from current levels over the medium term. Its Onslow Iron Ore project is commencing ramp-up towards positive cash flow contribution from mid-FY25. The mining services business should see a positive step-change in volumes and earnings over the coming 18 months. Finally, the lithium business has significant volume optionality to produce over 1,000kt of spodumene concentrate when market conditions improve.
