Tim Treadgold: Rising exploration spending a boost for assay lab operator ALS
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If the promises made at last week’s Diggers & Dealers forum about a big boost in future mineral exploration spending are kept then a handful of ASX-listed companies are well-placed to benefit.
Two potential winners are the specialist drillers, Swick Mining Services (ASX:SWK) and Ausdrill (ASX:ASL). Both have already enjoyed a share-price uplift with Ausdrill doing best.
Despite weakness over the past week Ausdrill is up 40 per cent since early June.
But there is another company with a mining services division equally well placed to share in the extra spending on exploration, and while it has a low-profile and rarely scores a mention in mainstream new media, investors might find it worthwhile to take a look at ALS Ltd (ASX:ALQ).
Technically known as geochemical analysis, the assay business is one of four business units in the ALS Commodities division, alongside metallurgical testing, plant inspection services and coal studies.
One of the reasons investors tend to miss the minerals and metals services operation of ALS is that the company also has a big pharmaceutical and life sciences operation all the way through to industrial hygiene.
Important profit centres as the other parts of ALS might be the unit most likely to outperform in the next few years, assuming the miners speaking at Diggers were not simply shooting the breeze, is assay and metallurgical work.
In simple terms, the ALS geochemical business is plugged directly into exploration spending, when drilling rises so does the assay lab cash flow and while there was a slowdown in field work earlier this year the outlook is for a strong rebound.
At Diggers the exploration message was that spending is tipped to over the next few years grow by between 20 per cent and 25 per cent.
Several companies used their podium time at the conference to talk about nothing other than exploration, including two of the bigger gold producers, Newcrest Mining (ASX:NCM) and OceanaGold (ASX:OGC), as did the world’s second biggest miner, Rio Tinto (ASX:RIO), which is already operating one of Australia’s biggest copper exploration efforts at its Winu discovery in WA.
UBS, an investment bank, said in a post-Diggers research note that the overall mood of mining-sector service providers was optimistic, if a little patchy in parts.
Citi, another investment bank, singled out the gold sector as the likely exploration driving force.
“Stronger cash flows from higher gold prices could result in growth in exploration budgets for major and intermediate producers,” Citi said.
A secondary boost for the service providers such as drillers and assay labs could be the increased confidence in the gold price staying high, which should flow through to junior explorers by making it easier to raise funds from investors.
Another opinion on the outlook is very much ALS focused and comes from a third investment bank, Credit Suisse, which has just upgraded its investment recommendation from neutral to buy, accompanied with a $1 increase in the future price tip from $7.40 to $8.40.
For speculators looking for a fast and furious return on their cash ALS is probably not the ideal stock, but for investors interested in a more comfortable ride, the appeal of a mining sector service provider at the start of a business upswing might be appealing – though you might have to be quick because the stock has started moving.
When Credit Suisse upgraded ALS on Monday it was trading at $7.18. By Tuesday afternoon it had reached $7.50, an interesting measure of investor interest given that the overall market has been flat this week.
What caught the eye of the Credit Suisse analysts was the changing mood in the exploration industry which could be seen in the latest measure of drilling activity.
“The total number of drill-holes in July rose by 81 per cent versus June to 4140 (up 8 per cent year-on-year),” Credit Suisse said.
“The total number of exploration projects for July was up 36 per cent since June and marked the highest number of exploration projects since January.
“Our proprietary leading indicator for ALS’s Geochem sample flow suggests a solid recovery in the second half of the current financial year.
“We expect this to deliver a re-rating of the shares.”