Monsters of Rock: Ellison to fall on his sword ... slowly

MinRes sets exit strategy for Chris Ellison after governance drama
Iron ore and lithium miner sinks 8.5%
Materials sector down slightly on mixed day

After weeks of turmoil, Mineral Resources (ASX:MIN) has announced managing director Chris Ellison will leave his post as managing director of the mining and mining services firm he founded over 30 years ago, forfeit $9.6 million in current and future share awards and pay $8.8m in penalties for a string of indiscretion he says have caused him “great personal embarrassment”.

James McClements will also abdicate his role as chair as soon as a suitable successor is identified and no later than the 2025 AGM when his tenure on the MinRes board will hit 10 years. Ellison is expected to stay in his role for 12-18 months, with the company revealing it had already pulled in a recruitment firm to identify a new leader.

Ellison has agreed to repay $3.79 million to MinRes over payments made to a company owned by him called Far East Equipment Holdings without adequate related party disclosures back in 2006 and 2008.

The revelation of equipment sales by MinRes to the company and an ATO settlement related to underpayments from Ellison’s private interests sparked the current crisis when they were made public in the media last month.

An internal investigation from Herbert Smith Freehills, a law firm engaged since 2022 to look into Ellison’s non-disclosures, revealed a number of benefits that arose to Ellison and his family from related party transactions, including rent paid to entities in which he has an interest, rent relief to his daughter and indirect financial relationships to an entity in which his daughter has an interest.

While they were disclosed by Ellison, the MinRes board said:

“… he failed to appreciate the importance of transparent and timely disclosure of matters that could give rise to a potential or actual conflict of interest. As and when these matters have been brought to the Board’s attention, steps have been taken to check that each is appropriately assessed and disclosed. The Board has worked to significantly improve the controls on related party transactions and their disclosure, and is satisfied that these matters do not impact its recent financial statements.”

It’s also concluded Ellison used company resources for his own benefit, with MinRes employees directed to work on his own boat and properties, managing his personal finances and the company used to procure goods and services for his private use.

“The Board is satisfied that the use of MinRes resources and assets in this way has not caused material financial detriment to the Company. Where Mr Ellison has used the Company to procure goods and services, procedures existed to ensure that he paid the Company for these goods and services.”

Also damning, MinRes says a number of emails around FEEHL were deleted five years ago.

“The Board has concluded that this was an attempt to avoid information regarding FEEHL becoming public. These actions were taken at around the time that Mr Ellison commenced the process of self-disclosing to the ATO, and before the ultimate voluntary disclosure and settlement with the ATO,” MinRes said.

Penalties galore

The MinRes’ board’s admission of it and Ellison’s corporate governance faults will see the Perth billionaire also tip $5m in charitable contributions at the rate of $1m annually over five years.

He will also wave $6.5m in unvested long-term and short-term incentives and MinRes has withdrawn a proposal from its AGM this month that would have seen Ellison issued the equivalent of $3.1m in incentives.

“I am deeply sorry for the events that have occurred and the impact they have had on MinRes’ reputation,” Ellison said.

“I apologise to the rest of the Board and to our people, who expect and deserve better from me. I acknowledge that I made mistakes, some of which were driven by my wish to keep private certain events that cause me great personal embarrassment.

“I am committed to the leadership succession that the Board has announced, and I will work tirelessly to win back the confidence of investors and our whole MinRes team.”

McClements said the board “faced a unique set of circumstances, with a high-performing, value-creating Managing Director, and an array of governance issues that, in aggregate, created an environment that required us to make changes,” he said.

“The Company’s rapid growth, particularly in the last five years, placed pressure on its governance systems and processes. While we have been working to improve those systems and processes, we recognise the need for accelerated change that reflects our status as a major ASX-listed company.”

The company’s share price, already under pressure from low lithium prices and balance sheet stress, tumbled 7% this morning.

Fundies and investment banks have taken different approaches to the news. Citi lopped MinRes to a sell rating, with Kate McCutcheon saying the ‘slow pace of change’ will weigh on MinRes and dropping her price target 30% to $35.

RBC’s Kaan Peker on the other hand maintained an outperform and $64 PT.

He views the move today as a positive, as it enables Ellison to stay on for the Onslow Iron ramp-up, and provides an ‘appropriate transition period for a thorough and planned succession of Chris Ellison and his duties.

Peker notes Ellison, 67, will likely remain involved in the business. He holds more than 11% of the company’s shares. The succession is the key concern over the medium term, says Peker.

“Despite the recent governance issues, Chris Ellison still appears well regarded by the market, as the founder led company is entrepreneurial, has lower bureaucracy, and clarity of vision,” Peker told clients in a note.

“However, the business appears to be looking to strike a balance as it matures, with Chris Ellison taking a less active role a few years earlier than we would have expected.”

L1 Capital, which was a buyer of MinRes stock in the days after the Ellison scandal broke, meanwhile came out in support of maintaining the founder as CEO.

MinRes’ loss stood out like a sore thumb across the large cap miners. But it was a mixed bag for mining and energy stocks more broadly, as stagnant commodity prices saw bets each way.