As Australia’s mining boom surged in the early part of the decade, one of the methods suggested to gain exposure to it was through the mining services companies, on the investment adage that the person who gets richest in a gold rush is the one who sells the shovels to the miners.
The theory worked well enough during the boom, but there were fairly dire ramifications for many of the mining services companies as the boom inevitably unwound. Many of the players who were riding high in 2012 are no longer on the stock exchange, and there have been some brutal share price falls from peak to trough for the survivors, as commodity prices slumped, mining companies slashed capital spending and forced their suppliers to accept less lucrative terms on contracts.
But there remains a resilient population of mining and oil/gas services suppliers taking advantage of the fact that mining and resource extraction continues, that large construction jobs have shifted into maintenance contracts, that new projects continue to get the go-ahead – just not on the scale that they once did. The service suppliers have had to cut their costs to survive, and, in some cases, work for equity rather than payment, to stimulate activity and keep their workforce going.
Recovery is patchy across commodities – gold and lithium have been hot this year – and slowly, confidence is returning to the sector. Despite the price outlook, iron ore bolsters that confidence, as the big four – BHP (BHP), Rio Tinto (RIO), Fortescue (FMG) and Hancock prospecting – increase volumes.
Balancing this is the fact that there is plenty of surplus capacity in the business, but some maintenance providers can see better times as operators push existing equipment harder.
Some of the mining services players are also expanding into areas such as civil infrastructure and renewable energy to diversify earnings.
Mining services is a business in flux, but there are opportunities for discerning investors who want this exposure. Here are four stocks that look the goods for FY17 and FY18:
GR Engineering Services (GNG, $1.64)
Market capitalisation: $253 million
FY17 EPS change: –13.8% to 10.9 cents
FY17 DPS change: up 5% to 10.5 cents
FY17 forecast dividend yield: 6.4% fully franked
Analysts’ consensus target price: $2.08
GR Engineering Services is an engineering consulting and contracting company that provides fixed-price engineering design and construction services to the resources and mineral processing industries. The resources contractor upgraded its FY16 earnings forecasts in August and subsequently unveiled a 17.7% lift in revenue to a record $255.3 million, and a 49.5% lift in net profit to $19.3 million.
Engineering, procurement and construction (EPC) services were at record levels. Base metals contributed 58% of FY16 revenue, with gold accounting for 25%, oil and gas 15% and other metals the balance.
At year-end, GR said contracted revenue for FY17 was approximately $115 million: subsequently the company won a $12.5 million contract with Eastern Goldfields for EPC services for the refurbishment of the Davyhurst processing facility north-west of Kalgoorlie, which has been on ‘care and maintenance’ since 2008.
Last month, GR announced that it would lead a feasibility study for Kibaran Resources Limited (KNL) on production of lithium-ion battery-grade graphite from its Epanko project in Tanzania. GR is already Kibaran’s engineering partner for the development of the Epanko project: the lithium-ion battery-grade graphite expansion would add significant value to the project.
In the current financial year GR expects ongoing contributions from the Nova nickel project and the Chillagoe polymetallic project in Australia, the Wetar copper expansion project in Indonesia and the Olympias Phase II gold lead/zinc project in Greece. The company says it has solid study pipeline and tendering activity, with 16 studies underway, and if conversion of these opportunities is consistent with historical conversion rates, FY17 revenue should be broadly consistent with FY16. In the meantime, according to Thomson Reuters, despite an expected earnings slip in FY17, analysts see a juicy 6.4% fully franked yield and substantial room for share price growth.
In FY18, on Thomson Reuters’ numbers, analysts expect GNG to pay a fully-franked dividend of 11.5 cents, which prices it, at $1.64, on a prospective FY18 fully franked yield of 7%.
Source: Yahoo Finance
MACA (MLD), $1.725)
Market capitalisation: $401 million
FY17 EPS change: up 18.4% to 12.3 cents
FY17 DPS change: up 5.9% to 9 cents
FY17 forecast dividend yield: 5.2% fully franked
Analysts’ consensus target price: $1.79 (Thomson Reuters)
Contract miner, civil engineer and transport provider MACA showed the difficulties of the sector in FY16, with revenue down 28% (to $431.4 million) and net profit down 56% (to $24.2 million) but the company won a swag of work in FY16, and had “work in hand” worth $1.1 billion at June 30.
During FY16, MACA won jobs for Blackham Resources’ (BLK) Matilda gold project, Regis Resources’ (RRL) Moolart Wells Extension, Doray Minerals’ (DRM) Deflector mine, Atlas Iron’s (AGO) Wodgina project, Metals Mining Group’s Golden Grove precious and base metals project and Avanco Resources’ (AVB) Antas copper mine in Brazil.
In April 2016 MACA also expended into civil engineering/infrastructure, buying a 75% stake in Services South East Limited, a road asset management and maintenance business in Victoria and South Australia. The business is now called MACA Infrastructure.
MACA’s balance sheet is strong, with $41.9 million in cash, and the company is well-placed to gain new work and boost earnings. MACA’s revenue guidance for FY17 expects more than $470 million, and the company says the positive working capital position plus its work-in-hand position provides a sound platform to maintain the dividend payout ratio – which augurs well for the attractive 5.2% fully franked expected yield.
In FY18, on Thomson Reuters’ numbers, analysts expect MACA’s earnings growth to really get cracking, up 44%, with the dividend lifting by 55% to 14 cents – which prices MLD on an expected FY18 fully franked yield of 8.1%.
Source: Yahoo Finance
RCR Tomlinson (RCR, $2.69)
Market capitalisation: $376 million
FY17 EPS change: from –11.6 cents in FY16 to 26 cents
FY17 DPS change: –2.7% to 9 cents
FY17 forecast dividend yield: 3.3% unfranked
Analysts’ consensus target price: $3.03 (FN Arena)
Diversified engineering and infrastructure company RCR Tomlinson provides integrated engineering solutions to the infrastructure, energy and resources sectors, with operations in Australia, New Zealand and Asia. In FY16, revenue fell 14% to $890.5 million and the company reported a net loss of $16.2 million, but the underlying profit after tax came in at $20.1 million, toward the top end of consensus estimates.
RCR ended FY16 with a combined order book and preferred contractor status of $1.5 billion, a lift of 48% on the previous year. In August it added a $120 million contract with Rio Tinto to deliver a primary crusher and overland conveyor system for the Silvergrass iron ore mine in Western Australia, making $500 million in new contract wins in just four months. The company says it is now positioned for strong revenue growth in FY17 with a number of contracts flowing through to support FY18 revenue.
RCR is increasingly well-diversified across mining, energy, water, rail, transport and renewable energy, with the energy and water business the focus of growth in the Asia-Pacific region. Infrastructure contributed 57% of revenue in FY16, while resources accounted for 26% and energy 17%. According to FNArena, analysts see earnings per share (EPS) surging back into the positive in FY17 and also see scope for significant share price appreciation.
Source: Yahoo Finance
Lycopodium (LYL, $2.61)
Market capitalisation: $104 million
FY17 EPS change: no forecasts available
FY17 DPS change: no forecasts available
FY17 forecast dividend yield: no forecasts available
Analysts’ consensus target price: $5.10 (Thomson Reuters)
Lycopodium operates in six segments: process industries, infrastructure, asset management, rail, metallurgical, and project services Asia. The company surged back from loss in FY16, making net profit of $3.33 million (compared to a $1.01 million loss), on revenue that was up 1% at $124.5 million.
More than 80% of Lycopodium’s revenue comes from outside Australia. Since year-end the company has won a $68.5 million to design and build a gold processing plant and other facilities at Toro Gold Limited’s Mako project in Senegal – where Lycopodium had already done the pre-feasibility and definitive feasibility studies – and a $38.4 million contract for Perseus Limited’s (PRU) Sissingué gold project in the Ivory Coast (again, LYL conducted the definitive feasibility study [DFS] and front-end engineering and design [FEED] studies for the project.)
Based on its pipeline of work, Lycopodium has told the stock market that it expects revenue in FY17 of $200 million and profit of $6 million. But analyst coverage is hard to find on this stock.
Source: Yahoo Finance
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.