Aussie miners are facing falling commodity prices and slowing demand – and across the sector miners are reducing or eliminating exploration activities, postponing expansion plans and cutting costs. As a result, mining service providers are facing dwindling business coupled with miner demands for better pricing.
Competition amongst service providers will likely lead to the elimination of those whose balance sheets cannot withstand the shock of lower profitability and shrinking margins. A company with long-term debt covenants can find itself in deep trouble should the lenders call the notes.
Investment history tells us the strong will survive, but who are they? Certainly great risk can lead to great rewards, but is investing in the beaten-down mining services sector the best way to play a long-term rebound in mining?
While a diversified array of products and services would seem to be one factor to separate the strong providers from the weak, this belies the fundamental problem here. With commodity prices low and operating costs high, all mining services face the same problems, regardless of what they offer.
On 17 April 2013 mining services provider Ausdrill Limited issued a profit warning, substantially lowering expectations. As recently as February the company had reaffirmed guidance at a net profit of $112 million. Management has since dropped the forecast almost 20% to $90 million, citing the slowdown in the mining sector.
GDP growth for China, at 7.6%, is slower than forecast; the gold price has retreated suddenly and copper prices are down. Miners have responded by cutting back on exploration and production activities.
On 19 April rare earth miner Iluka Resources also announced plans to cut production and profit forecasts.
The end result is a horde of mining service providers chasing diminishing demand and lower prices for their services. The survivors will be those with solid margins, low debt, and ample cash on hand. Additionally, mining services companies generating revenue from non-exploration mining activities should have an edge.
Share Price/YoY Change
5 Yr PEG
Total Cash on Hand
$5.05 / -36%
$1.72 / -54%
$0.825 / -75%
$2.74 / -32%
$2.15 / +6%
Boom Logistics Ltd
$0.23 / -20%
Mastermyne Group Ltd
$1.16 / -47%
The following table includes 7 targets for analysis.
The table includes forward-looking price/earnings numbers (Ausdrill and Iluka serve as a stark reminder that estimates can change).
Bradken Limited (BKN) has a two-fold advantage. First the company serves multiple industries – mining, energy, and rail. Second, Bradken designs, manufactures, and distributes consumables. Bradken’s mining exposure spans the gamut from coal to iron ore to gold to copper.
Regardless of a slowdown, miners will continue to need consumable items to support existing operations.
Companies like Bradken have suffered as miners drew down inventories but analysts reckon spending on mining consumables will resume even though at lower levels.
Bradken has manufacturing facilities in China and North America, in addition to Australia. Broadly speaking, Bradken makes products needed to process and move the commodity mined, including grinders, crushers, rig casings, and rail transport wagons.
The company released 2012 Interim Results in February, boasting a 9% increase in NPAT and a 15% increase in revenue from mining consumables. The share price rose 11% on the news.
Bradken’s gearing is high at 76.3% with total debt of around $550 million against total cash of $98.9 million. However, in an 18 April 2013 release showcasing the completion of a new manufacturing facility in China, the company pledged to cap capital expenditures to 2.5% of sales by 2014. Company management advised they see no evidence of a mining rebound happening in FY 2013.
Following the release of Interim Results, analysts at Credit Suisse and Macquarie upgraded Bradken from NEUTRAL to OUTPERFORM.
While past performance is no guarantee, here is a five year chart for Bradken; while the stock price is still negative over five years, shares have recovered about 60% from the low of 2009:
Ausdrill Limited (ASL) provides drilling, blasting, and earth moving equipment to miners in Australia and in Africa. The company also provides supply and logistic services as well as consumable products like drilling rods and rigs.
Ausdrill’s share price dropped over 7% in response to its profit warning. Following the announcement an analyst at Citi downgraded the stock from BUY to NEUTRAL and cut the target price from $3.60 to $2.05. JP Morgan, Deutsche Bank, and UBS maintained BUY or OVERWEIGHT ratings.
Interestingly, Citi analysts focussed on gold price weakness – and in Ausdrill’s profit warning, management noted that 57% of revenue came from a weakening gold sector. Citi believes the gold price volatility warrants the downgrade. In addition, the company generates an additional 29% of revenue from the beleaguered iron ore miners.
Ausdrill has a hefty dividend yield of 8.6% and a P/B ratio of 0.83. To put the P/B in perspective, for a current share price of $1.72 you can buy $2.54 of book value. While Ausdrill certainly represents a high-risk investment, the 5 year share price performance suggests it may be worth a look. Here is the chart:
Boart Longyear Limited (BLY) provides both drilling services and consumable drilling equipment to gold, copper, iron ore, and nickel miners. The company went into the GFC with a weak balance sheet and came close to shutting its doors in response to the dramatic drop in global demand. Boart’s share price has struggled ever since, as you can see from its 5-year price chart:
Boart suffered the largest year over year decline of any of the service providers in our table, dropping 75% of its already depressed value. Although current gearing of 53.9% may seem high, Boart’s gearing at the end of FY2008 stood at a staggering 534.9%. The company has reduced its long-term debt from $1.2 billion at the end of 2008 to $579.5 million for FY 2012.
Despite experiencing a modest decline in revenue from FY 2011 to FY 2012, Boart reported a 29% decline in net profit and earnings per share; a 9% drop in gross margins; and a troubling 122% increase in net debt. Interestingly, in early April 2013 both Macquarie and CIMB Securities upgraded the shares to OUTPERFORM. In short, analysts felt the share price was assuming a worst-case scenario.
With a share price of $1.29 at the time of the recommendation (09 April), the Macquarie analyst noted the price is assuming downgrades to forward guidance of over 35%. As at the close of trading on 18 April, the share price had fallen to $0.83.
Boart’s book value per share for the most recent quarter was $2.50. For high-risk investors, this one could be quite the bargain. However, on 19 February an analyst at UBS downgraded Boart to SELL, citing capital raising concerns. Boart’s current dividend yield is 7.3%.
Ausenco Limited (AAX) is perhaps the most diversified service provider in the table offering engineering and project management services to resource and energy companies around the world. Ausenco has four operating divisions – Metals and Minerals; Process and Infrastructure; Environment and Sustainability; and Energy.
The company’s FY 2012 Full Year results reported in February were stellar. Revenues were up 15.6%; earnings per share up 55%; and net profit after tax increased 59%. In contrast to employee cutbacks at other service providers, Ausenco increased total personnel by 12.4% around the world. The company has an attractive dividend yield of 7.7% and yet the stock price has remained essentially flat since bottoming out following the GFC. Here is the 5 year chart:
Analysts at CIMB Securities, UBS, and Deutsche Bank have BUY recommendations on Ausenco, with CIMB highlighting the merits of its diversified offerings.
RCR Tomlinson (RCR) is the only service provider in our table to eke out a positive year over year price increase of 6%. Investors have been well rewarded over 5 years as well.
RCR Tomlinson is primarily an engineering firm providing construction and project management services to four sectors – Mining, Energy, Resources, and Power. RCR designs and manufactures processing and materials handling equipment for miners; provides solutions to power generation and thermal energy facilities; provides structural, construction, and maintenance assistance to the oil and gas and LNG sector; and instrumentation, control and distribution systems to the resources and infrastructure sectors.
This broad range of diversified services yielded outstanding Half Year 2012 results. Revenues increased 17%; NPAT was up 83%; and the company increased its dividend by 25%. During the period RCR was added to the ASX 300 Index.
In March of 2013 RCR announced its intention to acquire the Norfolk Group (NFK) a provider of electrical, communications, property, and HVAC (heating, ventilating, and air conditioning) services throughout Australia, New Zealand, India and VietNam.
Following the announcement analysts at Macquarie and CIMB Securities reiterated OUTPERFORM recommendations on the company, noting that while the acquisition will almost double the company in size, integrating Norfolk’s inconsistent profit history may prove challenging.
Boom Logistics (BOL) provides a range of industrial equipment including cranes, travel towers, and transport equipment. The company serves the mining and resources, energy, utilities, and infrastructure sectors. Boom provides equipment operators as well as the lifting equipment to meet customer needs when warranted. The company’s past history included multiple acquisitions that weakened its balance sheet. However, those acquisitions left Boom as the only equipment provider of its kind available in Australia. Nevertheless, share price action since the GFC has underperformed. Here is the chart:
Half year 2013 results released in February showed a slight drop in NPAT from the year ago figure of $8 million to the current $7.6 million. However, the company had issued a profit warning and the lowered result exceeded the lowered guidance. Analysts at UBS and CIMB Securities maintained BUY recommendations on the company. UBS sees the stock as undervalued while CIMB foresees 12% compound annual growth out to 2015.
Note the tantalisingly low 5 year expected P/EG of 0.39. The company’s two year earnings growth forecast is 27.7% and the P/B for Boom is 0.34. Book value per share for the most recent quarter was $0.69 and as of 18 April 2013 you could buy a share of BOL for $0.23.
The final company in our table may be a hidden gem. Tiny Matermyne Group (MYE) has a market cap of $87.4 million and has only been trading on the ASX since 2010. The company provides underground coal mining services in the coal regions of the Bowen Basin in Queensland and also in New South Wales. Mastermyne has three operating units – Underground; Services; and Engineering, providing project management, engineering services, labour and equipment hire, electrical and mechanical services, underground roadways, and construction and maintenance services. Customers include Rio Tinto, BHP, and Anglo-American.
This junior has been paying dividends since its arrival on the ASX with a $0.012 per share payment in 2010; $0.061 per share in 2011; and $0.078 per share for FY 2012. The company reports Full Year Results in June and the recent Half Year Release included a 10% increase in the dividend. The Half Year Results also showed a 14.3% increase in revenue and a 2.2% increase in NPAT. BA-Merrill Lynch has a High Risk BUY rating on the company.
Despite faltering in the face of weakening coal prices, the company’s share price has managed to gain close to 10% – climbing from its entry price of $0.98 to a high of $2.38 in March 2012 before tailing off to its current price of $1.16. If you believe coal demand will improve and the price of natural gas will rise, Mastermyne is a stock to watch. Here is the company’s stock price chart:
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