“If the business earns 6% on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6% return—even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with a fine result.”
– Charlie Munger
1/ Return on invested capital — which we believe to be mostly a function of structural competitive advantage + management quality; and
2/ Opportunity for growth — i.e. capacity to deploy capital in high returning future opportunities
The combination of these two factors over long periods of time create truly great businesses. A TDM portfolio business, ASX listed Mineral Resources Limited (“MRL”) is a wonderful example of this. MRL is a leading provider of mining infrastructure services in Australia with a long and successful track record of delivering innovative and cost saving solutions to its end customers and project partners.
MRL listed in July 2006 when its pre-tax earnings were approximately A$25m. The capital then required to run the business was less than A$100m – generating a ~30% pre-tax return on invested capital. Most importantly, MRL’s founder-led management team (led by Peter Wade, Chris Ellison and a number of other long serving MRL lieutenants) have been able to grow the business significantly over the last 12 years by deploying incremental capital consistently at these high rates – sustaining an average ~30% per annum pre-tax return on capital (2007-2018).
Through the power of compounding (Einstein’s 8th wonder of the world!), this has produced extraordinary outcomes for the business. Adding it all up, MRL has generated a cumulative A$2.0bn in pre-tax earnings – and including MRL’s gain from its sale of 50% of one of its lithium assets, Wodgina this increases to more than A$3bn. By the end of this financial year, we estimate run rate pre-tax earnings will be more than A$500m (up 20x since IPO). This is an exceptional achievement considering growth has been mostly funded from retained earnings – without any material borrowings or large equity issuances (equity dilution has been modest at ~4% p.a. in the context of this growth – mainly as a result of 2 scrip funded acquisitions 7 years ago – shares on issue have been flat since 2013).
MRL’s long term shareholders (including TDM clients and MRL’s own management team) have been handsomely rewarded for their patience. If you were to have invested in the IPO at A$0.90 per share and held that share until today, accounting for a cumulative A$6.25 in gross dividends per share (reinvested), the total shareholder return has been over 30% per annum or 27x the initial investment.
Today, we believe MRL’s growth prospects and competitive advantage are stronger than ever – the average project size is getting larger and the underlying contracts longer. Over the next 4 to 5 years, MRL has the opportunity to invest an incremental A$2.0 to A$2.5bn of capital in its existing pipeline of projects and generate an incremental A$500m to A$750m p.a. of pre-tax earnings. Through a combination of A$1bn in cash on its balance sheet (pending completion of its 50% sale of Wodgina) and retained earnings, MRL is well positioned to continue to fund its growth organically to the benefit of long term shareholders. MRL is TDM Growth Partners’ longest continuing investment. We believe our unique understanding of MRL’s values and business culture has been the most important differentiating factor in the success of our investment over the last 12 years. Over the very long term, our experience is that a businesses’ people and its culture can be the ultimate source of competitive advantage and growth. We believe MRL is a fantastic case study of this important principal.