The ASX mining share Mineral Resources Ltd (ASX: MIN) has fallen heavily in the last few months. But one fund manager thinks this business is great value and is a big opportunity.
Fund manager L1 is so bullish about the business that it invested last week to increase its stake to 9.19% of the miner. It now owns 18.06 million shares of the company.
Mineral Resources shares plunged 35% in February and are now down over 70% from May 2024, as the chart below shows.
Why did the Mineral Resources share price fall so hard in February?
L1 explained that the February pain was caused by a three-month delay in ramping up the company's Onslow iron ore project and an additional $300 million capital expenditure to upgrade and repair the haul road connecting the project to the port after "severe weather damage".
The fund manager said the update was disappointing, but the Mineral Resources' share price reaction was excessive as it reduced the company's market capitalisation by approximately $2.6 billion.
L1 acknowledged concerns about the balance sheet are valid, though the investment team believe its gearing metrics are set to "dramatically improve" over the next 12 months as elevated capital expenditure comes to an end, Onslow earnings begin to contribute, and mining services earnings move structurally higher. The fund manager noted Mineral Resources has no near-term debt maturities and has several asset sale options to assist with deleveraging.
L1 thinks the company is undervalued because investors get three highly valuable business segments with an enterprise value of around $9.2 billion.
Mining services
The fund manager said that Mineral Resources' mining services division is "high quality" and has grown its operating profit (EBITDA) at over 20% per year over the past five years.
L1 believes the mining services segment is on track to achieve around $1 billion of EBITDA in FY27, with growth underpinned by long-life contracts. The investment team said:
In our view, this division alone would be worth close to the entire enterprise value of the company.
Iron ore
The second reason why L1 likes Mineral Resources shares is because its iron ore business is rapidly growing.
The fund manager pointed out that the ramp-up of the Onslow project later this year has the potential to deliver around $750 million of EBITDA in FY27, assuming an iron ore price of US$90 per tonne (which is 10% lower than the current iron ore price).
Lithium business
The third reason L1 thinks the ASX mining stock is attractive is due to the lithium division, with the main asset being a 50% stake in Wodgina, one of the largest hard rock lithium mines in the world.
The fund manager thinks the lithium segment is implicitly being valued at zero because the lithium price is at a major cyclical low. L1 noted that a large part of the lithium mining industry is loss-making at the current lithium price.
Based on valuations of similar lithium businesses with a similar size production base and cost profile, the miner could be "easily valued at around $3 billion" for Mineral Resources' interest.
Foolish takeaway
L1 also noted that the company is making steady progress in its governance refresh program. A new chairperson is expected to be announced in the quarter of the three months to June 2025.
The fund manager concluded the thoughts on Mineral Resources shares with the following:
Overall, we think the risk-reward at the current share price of around $21 is extremely compelling, with significant upside potential as Mineral Resources executes its key growth projects.
