Why Mineral Resources may be broken up before Chris Ellison’s departure

Mineral Resources chief executive Chris Ellison. Picture: Colin Murty

Market experts are not ruling out the possibility of the end game for Mineral Resources being a takeover or a break-up before its controversial billionaire founder and boss Chris Ellison walks out the door within 18 months.

The embattled Perth-based company, which has faced allegations surrounding the conduct of Mr Ellison, released findings of an investigation into his business dealings on Monday as shares fell 10 per cent on the outcome, closing down $3.91 to $36.70.

One shareholder spoken to by DataRoom said they were disappointed on news of his departure, saying they believed he should stay on.

Last week, some in the market raised the question as to whether fellow Perth billionaire Gina Rinehart would take over Mineral Resources, while there’s been some informal chatter that perhaps Wesfarmers would take a look.

On Thursday, Mrs Rinehart announced in a statement she was buying the energy assets of the Mineral Resources business for $1.1bn, saying she welcomed the opportunity to work alongside her “friend” Chris Ellison and his Mineral Resources team.

The price paid for the assets was higher than expected by market analysts and provided the emergency funds Mineral Resources needed to drive down its $4.4bn of net debt.

It’s not inconceivable that Mrs Rinehart privatises Mineral Resources.

The board, which has now established an independent ethics and governance committee, would almost certainly not want to embark on a related party transaction with Mr Ellison, ruling out the possibility that he buys all or parts of the business.

But there could be another way he can keep control of his empire out of the public eye.

This would be where Mrs Rinehart buys the business and then after the deal, he rolls into a private vehicle at a later stage.

Also, in terms of asset sales, perhaps a division like lithium is sold off when the market recovers.

A deal now would mean that it would come at a loss of about $400m to $500m to Mineral Resources, of which Mr Ellison is listed as a holder of 11.5 per cent.

Plus, the board is currently too distracted with other matters to embark on any formal asset sale process.

The development of the company’s Onslow iron ore development is at a critical point, being in ramp-up phase, and from that perspective, there would be investors who would see it as a disaster for Mr Ellison to leave in the middle of that.

The other possibility is that Mr Ellison, a billionaire, has a desire to move on entirely from the company in the 12 to 18 months from now when he is due to depart, even if it was his own choice.

But some who know him well in Western Australia doubt it, given his commitment to the business.

Strike Energy

Strike Energy’s shares rallied 7 per cent on Monday as it reinforced the value of its business.

Strike jointly owns the West Erregalla project with Warrego Energy, which is owned by Mrs Rinehart’s company Hancock.

West Erregulla involves a proposal to develop a gas processing facility and pipeline, but that is awaiting Final Investment Decision, with Hancock’s approval needed to proceed on time.

There may be concerns that Mrs Rinehart’s latest Mineral Resources deal could mean she delays that approval.

Strike would no doubt be keen to stress to investors that gas does not have to be processed through West Erregulla and could be sold to alternative owners.

The obvious being Beach Energy and Mitsui, which own Western Australia’s Waitsia gas plant, understood to be short of gas.

Sparking fears that West Erregulla could not be developed was Hancock’s words last week it would review Perth Basin interests, to identify opportunities and synergies, including the location and size of gas processing infrastructure”.

This may have sparked fears Hancock opts to process gas through a plant that was to be developed from her acquired Mineral Resources assets.