Mineral Resources Ltd (ASX: MIN) is an S&P/ASX 200 Index (ASX: XJO) mining stock that could be about to generate a lot more profit if a fund manager is correct about the ASX mining share's outlook.
Minerals Resources is involved in a few different areas of the resources sector – iron ore, lithium, mining services and gas exploration.
The fund manager in question is Romano Sala Tenna, portfolio manager of Katana Asset Management's Australian equity fund, who was talking to the Australian Financial Review about the share market and potential opportunities.
Fund manager views on the ASX 200 mining stock
The fund manager's model is indicating that "at least three of the four divisions will double earnings before interest, tax, depreciation and amortisation (EBITDA) over the next two years."
How could this affect the company's bottom line net profit?
The fund manager said the EBITDA growth will "generate earnings per share (EPS) in excess of $10 and a resultant price/earnings (P/E) ratio of less than seven times".
When asked which share is the most undervalued by the market, Romano Sala Tenna said that it was the ASX 200 mining stock that is the "most undervalued" even though it's up 75% since mid-July 2023 and up 250% since May 2020.
The fund manager said:
But if Mineral Resources delivers on its growth pipeline, then that is what it will be – the most undervalued stock in the portfolio.
The resources sector can be a tricky one to navigate, particularly because of the difficult nature of mining and because they have little control over the price. When asked about what makes a good investment in the mining sector, Romano Sala Tenna said:
It's all about the rocks! Geology is the key ingredient, but it is not as simple as grade.
While grade – or resource per vertical metre to be more precise – is critical, there are a host of factors that will determine whether the resource can be extracted commercially.
Metallurgy is critical, including an understanding of grind size to extract the minerals, ore hardness, processing pathways, impurities and recovery rates. Mine life and to a lesser degree exploration upside are also key determinants of whether the project is viable.
Management, needless to say, is pivotal. We have seen some management teams make big dollars from tough assets, yet others have failed to capitalise on seemingly easier deposits.
Foolish takeaway
If Mineral Resources shares are trading on a future earnings multiple of seven, then it would have a much cheaper P/E ratio than others like BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO).
BHP shares are currently valued at 11 times FY25's estimated earnings and Rio Tinto shares are valued at 12 times FY25's estimated earnings.
