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Mining
The takeover brou-ha-ha surrounding WA mining contractor MACA Interquip (ASX:MLD) has brought an under the radar but important sector of the ASX back into the laser-eyed focus of Australian investors.
There are dozens of companies on the ASX focused on delivering drilling, mining, analysis, construction and infrastructure, but they typically fade into the background compared to the pomp and ballast of the mining and exploration companies they service.
A shiny nugget or 10% copper drill hit gets the juices of investors flowing like a Swan Lager after a 10-day shift.
The contract rates for the driller that made the discovery? Less so.
But Thiess’ premium $350 million bid for WA focused contract miner, civil and construction expert MACA has shone the light on an industry so often forgotten.
Mining and exploration activity across the world remains strong despite concerns about economic growth, war and interest rates that have weighed on markets in recent weeks, hurting sentiment in explorers and miners.
As consolidation in the sector takes shape, are mining services players positioned to leverage demand in their offerings to rise above those headwinds?
Contracting has historically been a low margin business, with competition between multiple players and fixed prices in contracts commonly leaving firms providing services to the mining and construction industry exposed to margin squeeze.
There is no shortage of stories of companies burned by underperforming contracts. Memorably,Macmahon (ASX:MAH) took umbrage after mine plan changes hit its cash flow at Newcrest’s (ASX:NCM) Telfer gold and copper mine in 2019.
While those issues were resolved, with Macmahon later announcing the contract (since renewed) had turned cashflow positive, it stood as a lesson on the fragility of the services business on the decision making of clients.
Larger companies have increased capabilities and are able to spread themselves across a greater number of contracts, meaning they are less likely to fall prey to a single bad deal.
Acquisitions can provide access to new markets, or commodities where bigger companies don’t have expertise, while fewer major players in the market could also mean less competition for contracts to push prices down.
MACA’s suite of contracts in WA’s mining and resources sector is attractive to Thiess, which had a $1.025 a share bid endorsed by the target’s board in July, as it looks to diversify alongside its east coast coal contracts.
“The proposed acquisition of MACA is an important part of Thiess’ strategy to diversify its operations across commodities, services and geographies,” Thiess executive chair and CEO Michael Wright said on announcing the offer.
“Thiess has a high regard for MACA’s service quality, and we believe our industry experience positions us well to enhance MACA’s value proposition to clients and employees.
“We recognise and intend to maintain and grow MACA’s strong brand and presence in the Western Australian market. Thiess also looks forward to supporting MACA to meet the evolving needs of its client base through promoting further investment in low emission and technology-led solutions.”
But CIMIC and Elliot-owned Thiess isn’t the only shark swimming in the waters around MACA.
The plot thickened on Thursday when it emerged ASX-listed NRW Holdings (ASX:NWH) had put a 50-50 cash and shares bid valued at $1.085/sh to MACA’s board, only to have it knocked back.
“We are disappointed that the Board of MACA has indicated that it is not willing to entertain our compelling proposal,” NRW boss Jules Pemberton said.
“NRW believed it was uniquely positioned to offer attractive value for all MACA shareholders and, importantly, the benefits of continued exposure to MACA’s business as part of a larger and diversified provider of contract services to the resources, infrastructure and energy sectors across Australia.”
While the overall value of the NRW offer was, on the face of it, higher than Thiess’ at $375m (even more given a recent lift in NRW’s stock), the fact half of the non-binding proposal was in shares and what MACA says was an uncertainty of funding for the cash component enabled MACA to turn away.
MACA also had concerns about turning over its books to a competitor as part of the due diligence process, but said it would engage with NRW if it offered an improved deal.
Much of the question is about value, and specifically what dates you place on it. The value of NRW’s offer is highly dependent on the future price of its scrip.
While metrics used by NRW, like MACA’s pre-Thiess bid VWAPs, shine its bid in a positive light, MACA says NRW’s 30- and 60-day VWAPs ahead of its August 11 offer would place NRW’s bid at a discount to Thiess.
There is likely more water to run under this bridge.
In the hard rock underground mining segment there have long been two major players, privately owned Byrnecut and Perenti’s (ASX:PRN) Barminco, which merged into the former Ausdrill a few years ago.
But staff are getting harder to find and attract, and the deeper nature of discoveries, as well as concerns about the carbon intensity of open pit mining mean more underground mines are being developed.
Bill Beament, who cut his teeth in mining services with Barminco before turning Northern Star Resources (ASX:NST) into Australia’s second biggest gold miner, has just started the first contract for his new underground service provider Develop (ASX:DVP) at the Bellevue gold mine in WA.
He is keen on some other contracts, notably the world’s first underground lithium mine at Kathleen Valley owned by Liontown (ASX:LTR), which is high on Beament’s wish list.
But his capacity to take on contracts is limited and Beament warns miners will need to increase payment rates if they want to secure quality mining contractors and labour in the future.
With contracts like Newcrest’s Havieron, BHP’s Oak Dam and Rio’s Winu on the horizon, he told reporters at Diggers and Dealers this month contracting rates will need to go up to attract a shrinking pool of respected service providers.
““They’re all world class projects and quite big projects so they’ll support a contractor’s margin. But I just think the mining services margins have to go up,” he said.
“If you want good people, you’re going to have to pay for it.
“We’re gonna have to try and drag some of these people back from offshore as well. That’s the other part and you’ll only drag them back with money.”
Mining services stocks have been a mixed bag in 2022, frustrating anyone trying to get a read on the health of the sector.
Some have experienced incredible highs this year, powered by strong earnings, rising payment rates and the large volume of work generated by booming mining and infrastructure sectors at home and abroad.
But there have been plenty of losers as well, with familiar names like Perenti (ASX:PRN), Macmahon Holdings (ASX:MAH), Imdex (ASX:IMD) and ALS (ASX:ALQ) among those trading down in 2022.
Many have been weighed down by general investor angst, with labour shortages and inflationary pressures bringing service providers — known for their typically thin profit margins — down with the broader market.
DDH1 (ASX:DDH), the largest pure play drilling stock on the ASX after its takeover of Swick Mining Services, is down more than 20% year to date despite announcing record FY22 performance including record revenue of $506.9m on a pro-forma basis (up 14%) and underlying EBIDTA of $113.6m (up 10%).
It also demonstrated the improved trading environment for mining services stocks, showing it was making more revenue per shift and had moved to increase rates on the back of strong demand for drilling services from the mining and exploration industries.
“We achieved record results notwithstanding increases in underlying costs, particularly related to managing headcount considering COVID requirements,” DDH1 boss Sy Van Dyk said on announcing the results in July.
“Pleasingly we are successfully managing to meaningfully increase rates as contract renewals roll over, which will positively impact margin going forward.”
Some have been victims of their own dysfunction. DRA Global (ASX:DRA) for instance listed to much fanfare in 2021 and reported record high revenue for 2021 of $1.2 billion in February. Then it unravelled with a profit downgrade and a squabble over control of the company that saw its managing director resign and takeovers panel action against senior executives who engineered an abandoned board spill.
So who has been a winner in mining services this year? We’ve found five stocks that have delivered a strong return so far.
$1 billion capped NRW Holdings is up 25.14% year to date, and has been a stellar investment for a company of its size over the past five years, riding the rise in the mining and construction markets to record a 99.13% gain.
While NRW hit its peak of $3.40 a share in January 2020 and was hammered during the early days of the pandemic, losing almost two-thirds of its value in two months, its recent performance has been strong.
Highlighted last year by Euroz Hartleys industrials expert Gavin Allen as a stock to watch, NRW is back on solid footing.
Its 2022 accounts are testament to that, with revenue up 4.6% to $2.4b, EBITA up 30.1% to $157m, above its $150-155m guidance range, EBITDA up 2.1% to $272.4m, statutory net profit up 79.4% to $97.4m, cash up from $146.5m to $219.3m and full year dividends up 39% to 12.5c.
Hungry for growth, NRW took a major step into the battery metals market with a buyout of lithium plant experts Primero in 2022, and its potential bid for MACA makes no bones of MD Pemberton’s plans to grow its contracting business.
NRW’s positive share price trajectory will be a strong argument in its attempts to convince MACA’s board and shareholders its scrip can provide value against Thiess’ all cash bid.
MACA is up 32.5% YTD as well, though that is effectively all driven by the takeover premium.
SRG is another of the stocks Allen liked last year, and it has delivered in spades.
The contractor recently won a new five-year term at the Super Pit, where it has worked for some time, providing geotech ground support, rockfall protection systems, depressurisaton drilling and rope access services, as well as a maintenance contract at Meridian Energy’s NZ hydro and wind assets.
The $90m contracts add to a strong order book, which powered its EBITDA to the upper end of its $54-57m guidance for FY22.
There is more growth expected. SRG’s FY22 results are due out tomorrow, but it has already flagged that FY23 EBITDA should be 25% higher than FY22.
$312 million SRG is up 42.86% year to date.
GR Engineering is the go-to team in the mining industry when it comes to process plant design and construction.
It opened the year with a bang, reporting record half-year revenue of $302.3m for the first half of FY22, up from $176.3m in 2021, with EBITDA up 71%.
Trading near record levels, the biggest contributor to GR’s ~8% climb this year was a big guidance upgrade in June, when it flagged FY22 revenue was expected to be $620-640m, up from previous guidance of $580-600m.
GR recently picked up an $87.8m EPC contract to deliver the 1Mtpa process plant at the new Bellevue gold mine.
Steel fabricator Austin Engineering does dump trucks. Not the kind you build in the gym; it builds truck trays for miners, last year shipping its 1000th truck tray for Rio Tinto’s Pilbara iron ore ops.
The Perth firm’s business model has served it well, with the company up 22.73% on strong sales in 2022, including a profit upgrade last month.
Primarily based out of WA, Austin has operations in the USA, Chile and Indonesia and says it’s been able to avoid pressures from rising steel costs.
Last month it flagged a 7% upgrade in full year EBITDA guidance to a minimum of $32m with margins improving in the second half, a 2.5x lift on the $12.7m generated in FY21.
It expects revenue to grow further in FY23, with a July 1 2022 order book $49m higher than at the end of the 2021 financial year.
“Our order book growth particularly in the second half of the year and continued positive order flow has established a solid outlook for FY23,” MD David Singleton said last month.
“The bid win rate increase across the business is a direct result of some of the strategic growth measures we have put in place over the 2022 year, and I’m extremely pleased the measures are already resulting in a strengthened financial position.”
Monadelphous has the somewhat gross sounding nickname Monos, but that hasn’t deterred investors from backing the $1.09b engineering group, which is up 17% year to date.
Over the past couple of month the company has announced over $300 million of contract wins, including jobs with iron ore majors FMG, Rio and Roy Hill.
In the first half of 2022, MND reported a 12.3% rise in revenue to $1.065b and 17.7% lift in NPAT to $30.1m.
Mining
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