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The mining sector in Australia has been witness to explosive growth for quite some time, with some fluctuations based more on the current wildly irrational times rather than the fundamentals.  Is it too late to buy?

If your investment philosophy follows the maxim to buy low and sell high, it might be. Some investors with that mind set look for bargain basement junior miners forgetting the intense competition in the sector in the hopes their junior gem will grow up quickly.  However, if you believe in buy high and sell higher, buying in on significant market dips might be your cup of tea.

Some experts believe the mining services stocks are less risky than the miners they serve, since they are not immediately impacted by rising and falling commodity prices.  Contracts in place are not that often cancelled and the mining boom shows no immediate signs of slowing down.

Australian mining stocks have performed very well and two that have been mentioned on TheBull in recent months warrant a further look.  The companies are Monadelphous Group (MND) and Ausdrill Limited (ASL).

Why these two?  Although both are mining services companies, they target different markets.

MND serves the resources, energy and infrastructure sectors with a combination of services – engineering, construction management, maintenance and industrial services.

ASL serves both gold and iron ore miners with the following services – drilling, blasting, haulage, equipment hire, mineral analysis, contract mining and logistics.

In terms of share market perception, ASL is somewhat of the fair-haired child while MND leans more toward the red-headed step-child.  As you may recall from reading about ASL in earlier columns on TheBull, Reuters indicates 90% of the research analysts covering ASL have a buy rating on the shares.  

So let’s see what we can learn about these companies, starting with market valuation ratios and dividend yield.

Market Valuation Ratios

  ASL MND
P/E 12.5 18.54
P/B 1.55 9.11
P/S 1.09 1.24
P/EG .65 1.74
D/Y 3.6% 4.7%

 

As you may have read, golden child ASL recently reported its results and boasted a whopping 52% increase in profit, year over year.  And as you may remember reading in past months on TheBull, ASL’s share price has almost doubled over the past twelve months.

Yet despite that impressive fundamental and share price growth, the P/E ratio does not reflect a high growth share.  However, the P/EG at .65 appears to more accurately reflect ASL’s potential.

On the other hand, MND appears slightly overvalued.  As always, the more important numbers to consider are hard performance figures, like revenue, net profit, and earnings and dividends per share.  First, let us look at a 5 year performance history for ASL on those indicators.

ASL 5 Year Performance History

ASL 6/2008 6/2008 6/2009 6/2010 6/2011
Revenue ($m) 366.8 392.9 505.5 631 842.8
NPAT ($m) 27.5 35.3 40.7 48.3 73.4
EPS (Cents) 20.7 22.6 23.3 23.5 26.9
DPS (Cents) 8.9 10.9 10.9 11 12

 

As you would expect, ASL has increased revenue every year, with a jump of over 200 million dollars between 2010 and 2011.  ASL management obviously did a good job with expense control as that revenue translated into the 52% profit increase we mentioned earlier – rising from 48 million and change to 73 million and change.  However, that only yielded a modest dividend per share increase of one cent.  Now let us turn our attention to MND.

MND 5 Year Performance History

MND 6/2008 6/2008 6/2009 6/2010 6/2011
Revenue ($m) 963.7 954.3 1122.5 1275.4 1443.9 
NPAT ($m) 60.4 69.5 74.2 83.2 95.1
EPS (Cents) 71.1 77.2 86.3 95.5 106.9
DPS (Cents) 66 72 74 83 95

 

On revenue, MND’s 2010 to 2011 increase was somewhat comparable to ASL’s – almost 200 million – although they generate more total revenue with their moderately higher market cap.  While MND sports a respectable increase in profitability of around 14% that pales in comparison to ASL.  

However, MND shines when it comes to both dividends per share and earnings per share.  The 95 cents per share dividend is almost nine times larger than the 12 cent dividend paid by ASL.  

Both these companies have shown solid performance over a five year period that included the Great Financial Crisis.  So which one do you like?

MND and ASL-Bull and Bear Twins

With solid track records from both, we should also point out both have a portfolio of blue chip customers.  ASL serves Kalgoorlie Consolidated Gold Mines, Gold Fields Limited and BHP Billiton in Australia and Africa.  ASL generates 60% of its revenue from the gold miners, with the rest from iron ore miners.

MND is more diversified, but more dependent on commodities.  Their customers include BHP, Rio Tinto, and Woodside Petroleum.  Their total customer base spans iron ore mining, oil exploration and production, LNG and natural gas, and infrastructure.

The differences between the two make them somewhat of a pair of bull and bear reversible book ends.  While ASL has an added risk of government support in Africa, their predominance in the gold sector makes them well positioned should the current economic waves mushroom into the full blown GFC2 some doomsayers predict.

MND, on the other hand, would be at greater risk in the event of a GFC2 or a significant drop in Chinese growth and subsequent reduced demand for our energy and mineral resources.

In short, if your world view these days has a bearish tint to it, you might consider ASL over MND.  If you see the world in bullish hues, either will do.  If you are one who believes in a soon to pop bubble in gold prices, you might opt for MND over ASL.

At the moment, the world view of those who should know – the mining companies themselves – is decidedly bullish.  Mining companies are going all in, pushing the envelope on any project they can get their hands on.  Capital investment in mining is expected to increase by 50%.  Mining giant BHP recently reported record profits but has no plans for share buybacks.  They have already invested billions in anticipation of at least another 20 years of healthy Chinese demand and prefer to keep their cash at the ready for new expansion and acquisition opportunities should they arise. 

Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au.You should seek professional advice before making any investment decisions.