Fund manager stock pick: Mineral Resources (MIN) and The MAC Services Group (MSL)
Current share price: Mineral Resources-$4.25; The MAC Services Group-$2.86
Projection: Both to rise by 30-40% within two years
Fund manager: Steve Black, Pengana Emerging Companies Fund
With the mining industry geared up to invest substantial capital into the expansion of existing mines and the stgelopment of new operations during the next few years, mining services companies – which have been canny enough to jump into the resources slipstream – are set to reap the benefits.
Mineral Resources Limited, a Western Australian-based mining services and contracting company, with established long-term contacts with big miners BHP and Rio Tinto, has just entered into a 10-year contract with Precious Metals Australia (PMA). Pengana Emerging Companies Fund founder and fund manager, Steve Black is supremely confident about tipping the stock’s continued climb.
The company listed in July 2006 at 90 cents and is already trading at $4.25. Black predicts a share price rise of 30-40% within two years.
Focused primarily on the manufacturing and rental of large ore crushing machinery through one of its three subsidiaries, Crushing Services International, Mineral Resources has earned a reputation for creating and delivering in this specialised field.
Established for over 10 years, Mineral Resources is the only provider of large-scale crushers, which demolish millions of tonnes of ore per annum for ease of processing and transportation. Clearly, with a resource boom in full swing these crushers are in great demand.
“With the prices of iron ore and other commodities so high, mining companies want to get resources out of the ground as quickly as possible,” says Black. He notes that Mineral Resources is capable of building and operating the crushers at less than half the cost of other mining companies and in less than half the time.
Mineral Resource’s crushing division represents about three-quarters of the business. Its other subsidiary, Process Minerals International (PMI), which represents around 15 per cent of the company, owns and operates the Woodie Woodie fines operation in the Pilbara region of Western Australia, adjacent to Consolidated Mineral’s Woodie Woodie manganese operations. PMI produces 400,000 tonnes of high-grade manganese fines per annum.
Mineral Resources other subsidiary, PIHA, represents the remaining 10 percent of the business.
When Mineral Resources listed in July 2006 it was what is referred to as a compliance listing and there wasn’t much of a management sell down. “They wanted to be listed simply to enable them to access funds down the track if necessary,” says Black.
“They have sold very few shares in that time despite the share price rise. Even today the founder owns 41%, the CEO 9% and a couple of divisional mangers each own 12%. So you get the sense of engagement and alignment of interest.”
A recent Merrill Lynch report is also bullish for the stock: “We are raising our 2008E earnings forecasts for Mineral Resources by 8.6% to $32.5m on continuing strong spot prices for both iron ore and manganese”.
The other company that Black likes is The MAC Services Group, which provides accommodation for employees and contractors of mining companies.
The company listed in April this year at $1.50 and is currently trading at $2.86. Black anticipates that its share price will rise by 30-40% within two years.
MAC supplies large-scale, serviced accommodation to the coal mining, construction, resources and tourism industries in the Bowen Basin, Queensland. The company is looking to expand across to the West Coast and to diversify its operations.
Black notes that MAC builds, owns and operates the villages and is able to provide a complete package to mining companies in a similar vein to what Mineral Resources does with its crushers.
“One of the reasons we like this company is the long-dated nature of the revenue. MAC has long contracts with BHP and Rio both of which underwrite rooms for an extended period of time and therefore are obliged to pay even if they don’t use them,” he says.
Referencing both Mineral Resources and The MAC Services Groups Black says: “There are a lot of mining service companies out there and we’re very sceptical about investing in any that have short-term contracts”.