Fresh blood at Mineral Resources could be circuit breaker the company needs

Mineral Resources chief executive Chris Ellison. Picture: Colin Murty

Proxy houses have been calling around shareholders in Mineral Resources in recent days to assess whether to recommend that shareholders vote against resolutions at its annual general meeting in November.

The AGM is to be held on November 21 and proxy firms may recommend a vote against the group’s remuneration report and the re-election of directors Denise McComish, Jacqueline McGill, and the granting of share rights to founder and managing director Chris Ellison.

It comes after mining billionaire Ellison admitted he was a tax cheat who failed to make proper disclosures around a series of companies registered in the British Virgin Islands, and has apologised for what he calls “a serious lapse in judgment”.

He now faces scrutiny over his dealings at Mineral Resources while chief executive of the $6.7bn listed miner, including Minerals Resources business deals perceived as a conflict of interest.

Proxy firm Ownership Matters has taken exception to such matters in the past, including contracts awarded to the shipping company of his daughter Kristy-Lee Cracker.

So far, the James McClements-led board has stood behind Mr Ellison over the tax scandal and the company is not making further comment on other allegations.

However, other influential shareholders on the register with stakes above or around 5 per cent are AustralianSuper and L1 Capital, while Magellan Financial’s Airlie Funds Management owns close to 5 per cent, and the view is that they will be highly influential as to whether Mr Ellison stays or goes.

AustralianSuper, which reduced its holding to 4.89 per cent from 5.1 per cent last week, said it continued to engage with the board as it assessed its longer-term position in the company.

There had been suggestions that the shareholders may place mounting pressure on Mr Ellison to step down after the company’s share price fell a further 4.6 per cent on Friday, taking its market value to $7bn and its share price to $34.25.

The stock has fallen about 18 per cent in total over the week.

Mr Ellison is listed in the annual report as being the largest shareholder with 11.5 per cent.

Circuit Breaker

As the scandal plays out involving Mineral Resources, WiseTech’s founding billionaire boss Richard White has been under fire for embarrassing details emerging about his personal life, causing the share price of the logistics software group to tumble.

But news he was taking a break and would return in a new role as a consultant to the company proved to be a circuit breaker for the stock.

It caused the share price to bounce back by more than 12 per cent on Friday, the day after the announcement, in what could prove a useful precedent for proxy firms, directors and shareholders in terms of how to handle cases involving bad behaviour by billionaire founders of listed companies.

Market experts say similar instances in the United States would have seen Mr White step down far earlier and Mr Ellison already resign, as concern mounts that directors are not standing up to company founding chief executives when it comes to misconduct.

Even if pressure was mounting for Mr Ellison to stand down as chief executive, it is a move most expect that the founding billionaire would likely resist.

However, an investigation into matters by the Australian Securities and Investments Commission surrounding his business dealings may intensify that pressure, while directors could also leave the board.

Fresh Start

One theory in the market is that well-regarded mining executive Nev Power, who previously ran Fortescue Metals, could be brought on to the Mineral Resources board, while a highly respected executive like the former boss of OZ Minerals, Andrew Cole, who has no close links to Mr Ellison, could be head hunted to become the company’s new chief executive should Mr Ellison step down.

Another possibility is ex-Newcrest boss Sandeep Biswas.

Sources say such appointments would be treated favourably by the market.

However, the first big play by any incoming boss at Mineral Resources could be to tap the market, with many considering it to be line ball as to whether Mineral Resources needs to replenish its currently stretched balance sheet.

This could either be immediately or just months into taking the reins of the group.

As earlier reported by DataRoom, there’s estimates that a raise by MinRes could see it search for $1.5bn to $2bn, likely through its regularly used Wall Street banking adviser JPMorgan.

A further fall in the value of its shares, a decline in the iron ore price or breached lending terms with its financiers based on adverse findings into Mr Ellison’s conduct could all be catalysts.

At June, its net debt was $4.4bn.

Two of the top four Australian banks are in a revolving facility of $800m lent to Mineral Resources with key covenants, while the majority of the remaining debt is in the private placement market which does not have covenant arrangements attached and of which the first tranche is not due until the 2027-28 financial year.

Another possibility in the longer term is that the destabilising circumstances surrounding Mineral Resources leads to a company break-up, what with Mineral Resources already in the middle of a process to sell off its energy operations, namely the gas assets it owns in the Perth Basin, as it looks at ways to strengthen its balance sheet to fund developments including its Onslow iron ore project.

One market observer even went as far as suggesting that the other three units: lithium, iron ore and mining services, are also broken off and potentially sold over the longer term.

The company generates much of its income from its three iron ore hubs – Onslow Iron in the west Pilbara, Utah Point in Port Hedland and Yilgarn in Esperance.