All investors know – or should know, by now – that the metal and mineral markets are volatile at the best of times. But the sinking nickel, cobalt, and lithium prices in 2023 may have shocked some investors newer to the sector, especially those who translated what they thought was a story of rising demand for the commodities essential to the “clean energy transition,” and the electric vehicle (EV) revolution into elevated optimism for the miners of those metals.
The story for miners and the demand for the minerals they mine is not always smooth and linear – especially when there is geopolitical and market turmoil.
An exposure that can be an alternative way to invest in the sector is through the mining and drilling service providers, which are leveraged to their clients’ production volumes (ore hauled) and activity (exploration or development). While the actual miners are more directly affected by movements in commodity prices – both ways – the mining services companies are insulated to some extent; although they do face relentless pressure to price their contracts well.
Mining services providers can build a quite diversified business, exposed to a range of commodities, countries, and methods of mining (open-pit or underground). Some also have exposure to the civil engineering and construction markets.
Here are two mining services companies that I think have good potential to rise from here – one larger business, with a lot of work outside Australia, and the other (one-tenth the size) mainly confined to its home state of Western Australia.
1. Perenti (PRN, 81.5 cents)
Market capitalisation: $784 million
12-months total return: –35.3%
Three-year total return: –14.9% a year
Estimated FY25 yield: 5.6% unfranked
Estimated FY25 price/earnings ratio: 3.9 times earnings
Analysts’ consensus price target: $1.30 (Stock Doctor/Refinitiv, six analysts)
Perth-based Perenti is a diversified mining services group that offers contract mining (where the services provider company conducts the actual mining for its miner clients, with its own equipment, drilling services, mining services and technology solutions). The company has offices and operations across four continents and employs more than 11,000 people; it works at 60 operations and has more than 100 drilling contracts with clients.
In December, Perenti completed the $400 million takeover of ASX-listed global drilling company DDH1, which has operations throughout Australia, North America, and Western Europe. The deal made Perenti the second-largest owner of drill rigs in the world and positioned the merged company well to benefit from drilling for commodities critical to the energy transition.
The company, which is now the largest ASX-listed contract miner by revenue, has been a negative performer for shareholders for more than five years, but the situation for investors fresh to the company is a bit more attractive.
Perhaps counter-intuitively, the merged business will have an earnings profile more tapped into Australian mining; Perenti itself had a preponderance of revenue from gold production in West Africa, where it has operated for 32 years. The merger will also offer increased exposure to copper and nickel, which are commodities essential to various countries’ Net Zero targets – at the time of the merger, Perenti said its revenue from gold will come down below 60% as a result of absorbing DDH1, with copper and nickel exposure increasing to 25% each. Perenti is also exposed to production and expansion of existing operations, not to exploration activity.
But nickel’s 43% price slump over 2023 has badly hit some nickel producers. We saw that last month, when Perenti’s client IGO mothballed its Odysseus underground mine in Western Australia, in response to lower nickel prices. Working collaboratively with IGO, Perenti will transfer its Odysseus workforce to other projects across its global portfolio – showing the value of having a diversified portfolio of work.
In contrast, also in January, the company’s underground mining businesses won $420 million worth of contract extensions in gold, in Australia and Africa.
In December, Perenti released a guidance update that seemingly disappointed investors. It projected FY24 revenue for the enlarged group at between $2.8 billion and $3.0 billion, with underlying earnings before interest, tax, and amortisation (EBITA) at between $260 million to $275 million. But there was higher debt and a lower capital expenditure than expected.
But analysts are quite positive on the stock, with a consensus price target that translates into a price/earnings (PE) ratio of just 4.4 times projected current-year (FY24) earnings and 3.9 times FY25 earnings. There is also a solid dividend yield – although it is not franked.
Sometimes low-PE stocks are low-PE for a good reason – they are a “value trap” that looks too good to be true – but Perenti does not really look like one of them.
2. MLG Oz (MLG, 56.5 cents)
Market capitalisation: $83 million
12-months total return: 41.2%
Three-year total return: n/a
Estimated FY25 yield: 7.7%, no dividend expected
Estimated FY25 price/earnings ratio: 5.1 times earnings
Analysts’ consensus price target: 98 cents (Stock Doctor/Refinitiv, one analyst)
73%
Established in Kalgoorlie in 2002, MLG Oz operates across 33 sites in Western Australia and the Northern Territory, working for gold, iron ore, and other base metal miners. MLG provides mining services at 33 sites and employs more than 1,000 people.
The company offers mine-site services and bulk transport (89% of revenue), crushing and screening, construction materials (mainly sand and aggregate, sourced from its five quarries) and export logistics, through its facility at Esperance Port.
MLG’s sweet spot is clients with low-cost, long-life operations who are mainly in the production stage of the mining cycle, although its services span the full mining production cycle, from raw commodity production through to linking client operations to end markets. Some of the major client relationships include Goldfields, Newmont, Northern Star, Fortescue, IGO, Ora Banda Mining, Westgold, Red 5 and Mt Gibson Iron. All of these are Tier 1 and 2 clients with production-oriented activities.
The company works on an integrated business model, that offers clients a range of services under a single contract. This model spans a range of capabilities, including on-road and off-road bulk haulage capacity, civil construction, road maintenance, rehabilitation work, vehicle maintenance, machine and labour hire, and end-to-end bulk commodity export logistics solutions.
Commodity exposure is dominated by gold, but MLG makes a compelling case that demand in that commodity business outstrips supply. Gold production capacity has tripled in the last decade –along with a material uplift in battery and base metal processing capacity – but the supply capacity in the services that MLG offers has not grown at anywhere near this rate. The company says its services continue to benefit from high demand for greater volume of ore movements across the gold sector, and in the expansion of base metal markets to support the global clean energy transition.
The company is coming off a strong FY23, particularly in the second half, despite major challenges that are common to all the mining services operators: escalations in the cost of labour, parts and fuel, and the random nature of weather disruptions. Notwithstanding these factors, MLG Oz generated revenue of $375.2 million, up 31%, with underlying net profit of $10.5 million, up 18.7% (reported net profit was $800,000, down 83% on FY22, because the sale of the high-capacity crushing plants during the year incurred a non-cash loss of $9.7 million.) Financial debt was cut from $64.2 million to $54.1 million.
MLG Oz continues to build its contract portfolio and has told the market that it expects revenue growth into FY24 based on this current work and the continued demand for its services, adding that “the opportunity to continue to improve margin through reduced staff turnover, better cost control, improved productivity and strategic procurement remains our focus.”
Morgans is the only broker to follow MLG Oz that I have seen: it expects MLG to earn 9 cents a share in FY24 (up from 0.07 cents on the reported net profit of FY23), rising to 11 cents a share in FY25 and 13 cents in FY26. On those projections MLG is trading at just over five times expected FY25 earnings, with a fully franked dividend also expected in both years, to augment the total-return prospect. I think you can make a case for buying MLG at these levels.
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