In a rapidly changing global economy, commodities are positioned for a huge surge, driven by demand for metals in crucial sectors such as clean-energy, defence and industrial production. Over the long term, there are clear structural factors that
will likely continue to push commodity prices upward.
Investors are always looking to profit from this trend, and mining and energy shares are often the chosen route. But there is another strategy: investing in the businesses that serve the resources industry as suppliers. Here are three of the ASX-listed companies that, in the words of the old cliché, make money by “selling shovels to the miners” – or the drillers.
Mitchell Services (MSV, 37 cents)
Market capitalisation: $79 million
12-month total return: 20.9%
3-year total return: –2.2% a year
FY25 (June) Estimated Yield: 10.3%, fully franked (grossed-up, 14.7%)
FY25 (June) Estimated P/E ratio: 12.3 times earnings
Analysts’ consensus target price: 55 cents (Stock Doctor/Refinitiv, one analyst)
Mitchell provides drilling services to the minerals and energy sectors, across exploration, underground and mine services, but it is heavily biased toward production, development and resource definition drilling at existing mines, with those activities generating 80% of its revenue. That kind of work is much more stable than exploration drilling work, which is currently a very soft market.
Most of Mitchell’s work is done for global mining majors, such as Newmont, Glencore, Anglo-American, South32 and the Queensland-based the BHP-Mitsubishi Alliance (BMA), Australia’s largest producer and supplier of seaborne metallurgical (steelmaking) coal. Major clients of this calibre account for 90% of MSV’s revenue. Gold miners represent about 40% of revenue; 91% of total revenue comes from gold, copper and steelmaking coal.
Mitchell said that it saw continued demand for drilling services in FY24, with all of its key contracts expiring over the year re-signed. Although revenue slipped 3% in FY 24, to $236.8 million; and earnings before interest, tax, depreciation and amortisation (EBITDA) receded by 2%, to $40.4 million; net profit rose by 21%, to $9.2 million; and the full-year fully franked dividend figure of 4 cents was a 91% increase on FY23. The company’s return on invested capital (ROIC), at 16.5%, strengthened by more than one-third in FY24.
Mitchell has seen the number of drilling rigs it operates come down from 82 at the start of FY23 to 67 at the end of FY24. The company says the decrease in utilisation was mainly caused by a reduction in operating rigs under various long-term contracts, all of which remain active; Mitchell says the number of operating rigs associated with these longer-term contracts “will generally increase and decrease in the ordinary course of business throughout the contract term.”
The company has branched out into the decarbonisation market following reforms to Australia’s ‘Safeguard Mechanism’ legislation, by entering into a 50/50 joint venture to address this market, with specialist mining and engineering advisory firm, Talisman Partners. The newly incorporated Loop Decarbonisation Solutions will offer end-to-end decarbonisation solutions to a broad market of clients who are required to reduce fugitive emissions from their current operations under the legislation. Combining Mitchell and Talisman capabilities, MSV says Loop can help in all aspects of the decarbonisation solution from calculating initial marginal abatement cost curves to operational execution (including drilling) to assurance and reporting. The company says it is very rare in the drilling industry (or any industry for that matter), that an entirely new market (which is yet to be fully quantified) emerges over such a short period of time – MSV says it is excited to see where this leads. Broker Morgans says Loop could be a potential market opportunity “in the order of tens of rigs in the Queensland open-cut coal mining market,” although this opportunity is “expected to unfold over several years if viable.”
MSV has done some impressive work in strengthening its balance sheet in the last couple of years, using its strong free cash flows to net debt from $40 million two years ago to $1.9 million, while paying out to shareholders bout $13 million in dividends and a further $4.7 million in share buybacks.
Morgans says the stock is significantly under-valued by the market, with a forecast fully franked dividend yield conservatively estimated in the 8%—9% range (worth a lot more in the hands of self-managed super fund investors) considered solid ongoing compensation for patient shareholders waiting for the stock to be re-rated.
Worley (WOR, $14.94)
Market capitalisation: $7.9 billion
12-month total return: –7.9%
3-year total return: 18.7% a year
FY25 (June) Estimated Yield: 3.4%, unfranked
FY25 (December) Estimated P/E ratio: 17.7 times earnings
Analysts’ consensus target price: $17.84 (Stock Doctor/Refinitiv, ten analysts)
Worley provides professional project and asset services to the energy, chemicals and resources sectors globally. The company’s offering includes engineering and design; consulting; construction and project management and fabrication, as well as supply chain management, and maintenance services. It does work for the mining, minerals, and metals markets, as well as the new energy, power, refining and chemicals, and infrastructure markets, around the world: in FY24, the Americas region produced 41.3% of total revenue, with EMEA (Europe, the Middle East, and Africa) generating 39.7%, and Asia-Pacific 19%.
In FY24, energy accounted for 48% of revenue, with chemicals making up 30% and resources the smallest contributor, on 22%.
Worley has been an early mover in focusing on delivery of sustainability-related engineering, procurement, and construction (EPC) contracts – a form of contract used to undertake construction works by the private sector on large-scale and complex infrastructure projects – in the energy transition area, across its key energy, resources and chemicals markets. Just two years ago, sustainability-related EPC work represented 27% of Worley’s work-in-hand pipeline; that figure is now 51%. With $13.8 billion of work in this pipeline, Worley is well-positioned to grow its revenue over the near-to-medium term. This change in its business mix is driving steady margin growth, toward the company’s long-term goal of double-digit margins.
In FY24, total revenue grew by 18%, to $11.6 billion, of which, sustainability-related revenue was $6 billion, or 52%, up from 42% of total revenue in FY23. Underlying earnings before interest, tax and amortisation (EBITA) was up 24%, to $751 million; and underlying net profit grew by 27%, to $416 million. Worley paid an unchanged full-year dividend, of 50 cents a share. The EBITA margin grew from 7.3% to 7.9%; over the second half of FY24, it rose from 7.5% a year earlier, to 8.4%. The company is targeting low double-digit EBITA growth in FY25 and expects the underlying EBITA margin (excluding the impact of procurement) to be within a range of 8.0%—8.5% in FY25.
Of work won in FY24 – or “booked,” in Worley parlance – the total fell 2% in FY24, to $13 billion, with sustainability-related work booked declining by 12%, to $8.1 billion (62% of total work booked.)
Worley is positioned to benefit from strong structural tailwinds coming from increased spending towards sustainability projects globally, and this should support revenue growth and margin expansion. Higher energy prices could boost this, with increased project work within the energy sector. The analysts that follow Worley are quite positive on share-price growth prospects, and there is an unfranked yield of about 3.4%—3.5% to augment that. Worley looks like rewarding buying at this point.
Imdex (IMD, $2.36)
Market capitalisation: $1.2 billion
12-month total return: 61%
3-year total return: 0.9% a year
FY25 (June) Estimated Yield: 1.4%, fully franked (grossed-up, 1.9%)
FY25 (December) Estimated P/E ratio: 22.7 times earnings
Analysts’ consensus target price: $2.23 (Stock Doctor/Refinitiv, ten analysts)
Global mining technology company Imdex supplies miners working in more than 50 countries with a range of geoscience technology products and solutions that range from intelligent drill rig tools, fluid solutions, exploration solutions, drilling optimisation products, rock knowledge sensors, directional core drilling, cloud-connected data and analytics software, structural data collection and hole surveying knowledge to help clients optimise their blasting operations. It is the largest global supplier of core orientation tools and sensors, specialty drilling fluids and orebody knowledge software to the mining industry. Imdex says the entire product suite is designed to improve the process of identifying and extracting mineral resources, all the way along the production chain.
The company says its mission is to create technology that efficiently and sustainably unlocks the Earth’s value, enabling its clients to safely find, define, and mine orebodies with precision and at speed, while making safer and smarter decisions.
Exploration and development generate 80% of revenue, while production represents 20%. In this sense, Imdex has an inverted exposure to that of Mitchell Services; that has to be considered, given that exploration is in a slow phase, as capital raisings are difficult for explorers to mount. However, that is a cyclical aspect of the mining industry, and higher commodity prices – which is expected to accompany the increased demand for metals crucial to the clean-energy transition – tend eventually to induce greater exploration spending.
In commodity terms, gold – which has one of the most positive price outlooks – is responsible for half of Imdex’s revenue. The next biggest contributor is copper, at 25%: copper is one of the metals considered most central to the clean-energy transition. Then comes the grouping of cobalt, lithium and nickel, which are also tied-up with the same thematic, on 15% of revenue; and ‘other’ minerals make up the rest.
While the company mainly depends on exploration spending (particularly in copper and gold), most of this is for exploration around existing operations, being the drilling that miners do to extend the orebody and boost reserves. Imdex’s solutions are particularly relevant in the global mining market as major metal deposits become harder to find, and orebodies become progressively deeper and lower grade; working to extend known orebodies through exploring adjacent ground is more important than ever.
The remainder of Imdex’s work comes from ‘greenfield’ prospective exploration, which is more cyclical by definition. However, Imdex offsets this to some extent by its ability to innovate, which typically sees it incrementally growing it share of exploration spending.
By geography, the Americas contributes half of total revenue, with the rest equally shared between Africa/Europe and Asia-Pacific.
Broker Morgans says IMD has strong market positions in its key markets, with 55%—60% market share in tools and 45%—50% market share in fluids. It is four to five times the size of its nearest competitors.
In FY24, revenue rose 8%, to $445 million; ‘normalised’ earnings before interest, tax, depreciation and amortisation (EBITDA) increased by 7%, to $131 million; and net profit came in 7% lower than FY23, at $32.4 million. The full-year FY24 fully franked dividend was down 0.8 cents, or 22%, to 2.8 cents.
Imdex is the dominant global player in its field and is well-positioned to benefit from a turn in the exploration cycle, which does not seem to be too far away. The stock is trading above what Stock Doctor/Refinitiv’s collation of analysts’ target price estimates puts as consensus; financial information site Wallmine gives an analysts’ consensus 12-month price target of $3.00 for IMD but does not give the number of analysts that contributed to that figure.
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