Drilling companies DDH1 and Swick announce merger as mining services heats up

Speculation is turning to reality when it comes to consolidation in the mining services sector, with Perth drillers DDH1 (ASX:DDH) and Swick (ASX:SWK) announcing a friendly merger aimed at turning the combined entity into an ASX 300 listed company.

It comes off the back of suggestions well-capitalised DDH1 would be on the lookout for M & A opportunities with strong market conditions in the exploration and resource drilling industry laying the foundation for corporate activity.

The combined entity will have 170 rigs with Swick’s expertise as an underground driller complementing DDH1’s famed surface drilling business, with a mix of 60% surface and 40% underground exposure.

The merged company would have annual revenues of $445 million, and boasts a combined pro-forma FY21 EBITDA of $103 million.

DDH1 has been the beneficiary of a solid improvement in its share price since diving on debut. It is now up around 30% since listing in March.

As part of the conditional, non-binding and indicative proposal, it will offer 0.2970 shares for each share held by Swick stockholders, valuing Swick’s drilling business at $115 million, around 3.9x EBITDA

Swick shareholders will emerge with 19.7% of the company, which DDH1 says will have greater liquidity and the heft to build over time into an ASX 300 company.

Swick’s Orexplore business will still be hived off in an IPO which will include the distribution of shares to existing shareholders, putting a 35c per share price on the company’s drilling division.

That is a 32% premium to Swick’s closing price on October 6, with its shares soaring more than 20% in early trade this morning to 32.5c.

1+1=2 or more

According to the heads of both DDH1 and Swick, the combination of underground and surface drilling experience will deliver synergies over time.

“Partnering with the leading underground diamond driller in Australia is a natural evolution to our specialised surface drilling operations and in line with the disciplined growth strategy we unveiled as part of our ASX listing in March 2021,” DDH1 managing director Sy van Dyk said.

Van Dyk said the combined drilling fleet will be the largest in Australia.

“Further, with a combined drill fleet of more than 170 drill rigs in FY22, which will be Australia’s largest fleet, we expect to secure meaningful synergies over time.”

That's a win win for $SWK and $DDH
1+2 will equal 4 or 5 in time.

— Sam Berridge (@strikeextent) October 11, 2021

While DDH1 is renowned for its surface drilling capabilities, which include holding the record for drilling the deepest drill hole in Australian mining history, Swick has drilled well over 10 million metres underground since its founding during Kambalda’s early 2000s nickel revival.

Managing director and founder Kent Swick said there was commercial logic in the deal.

“We have grown Swick to become the largest underground drilling contractor in Australia with a market leading position, defined by solid margins and established top tier clients throughout the years both in Australia and internationally,” he said.

“There is a strong commercial logic in combining the DDH1 and Swick businesses and being able to offer our customers a complete range of high quality and innovative mineral drilling services from the discovery phase, through to mining and completion.”

Mining services emerging as an M&A hotspot

Mining services firms are increasingly recognising the opportunity to bulk up to both diversify their services and expand their businesses at a time of rising exploration and mining activity.

High commodity prices across gold, iron ore, lithium and the base metals complex have driven booms in exploration spending and investment in expansions from juniors and majors alike.

DDH1 secured the acquisitions of Ranger Drilling and Strike Drilling before its IPO when it was in the hands of private equity.

Fellow ASX newbie Dynamic Drill and Blast (ASX:DDB) has also been at the party, inking a $21 million takeover of Orlando Drilling earlier this year.

Meanwhile WA contractor McKay Drilling was the subject of an $80 million takeover in May from Canada’s Major Drlling.