It’s been interesting watching commentators explain the failure of Silicon Valley Bank and others in the United States this month – and the implications for markets.
Nobody knows for sure if other banks will fail, what these failures mean for markets or if contagion risks will rise for the global banking sector.
To me, the collapse of Silicon Valley Bank doesn’t look like systematic industry risk or anything like a re-run of the start-of the Global Financial Crisis in 2007-09.
Rather, the failure is an inevitable result of stretched financial conditions. The worst-run and worst-governed organisations always break first when conditions turn.
I do know that panic and negative sentiment creates opportunity, particularly in small-caps that can fall hard on big market sell-offs, amid fears of global recession.
To be clear, I still think Australia will avoid recession this year. Doomsday forecasts about our economy are overdone, but the risk of recession is rising.
Either way, I’m paying more attention to companies with pricing power and recurring revenues – in sectors that have above-average growth prospects.
Mining software is an example. Software-As-A-Service (SaaS) can be a fantastic business model. Once the software is developed and commercialised, the marginal cost of selling another copy of it is low. That’s why SaaS margins are often so high.
Another attraction is the recurring nature of SaaS revenue. Once companies embed the technology in their operations, it becomes harder to change providers. It’s reassuring when a high proportion of company revenue is locked in each year.
The market is well aware of the virtues of SaaS companies. But many general SaaS technology stocks have been belted amid the broader sell-off in tech.
Mining SaaS is a different proposition on two fronts. First, the mining industry has good medium-term growth prospects. I believe we’re still in the early stages of a commodity supply that will be characterised by supply constraints.
An obsession with Environmental, Social and Governance (ESG) ratings has meant less investment than usual in new mining and energy projects. That will constrain future supply, underpin higher commodity prices and encourage exploration.
That’s good for mining software companies. As resource companies lift exploration and dig deeper into copper and other projects this decade, software usage will rise.
The mining industry has been a slower adopter of new technologies, relative to some other sectors. That is no surprise. The mining industry is a big ship to turn. There’s plenty of great tech in mining today, but also room for a lot more.
I’ve never understood why Australia does not have more tech companies around its core industrial strengths. We should lead the world in mining tech, agritech, energy tech and education tech, but have only a small group of listed companies in these areas.
But there are only a handful of mining software stocks on the ASX to choose from. Thankfully, some of them have terrific prospects.
As an aside, Boart Longyear Group (ASX: BLY) recently announced it is ramping up its mining-technology business into a specialist entity, Veracio. That business has some highly innovative technology.
Here are my two preferred mining technology stocks:
- Imdex (ASX: IMD)
The Perth-based company made my list of top small-cap industrial ideas for 2023. Imdex was $2.23 in that December column. It hit $2.56 last month, but is now $2.09 after this week’s heavy sell-off.
Imdex helps drilling contractors find, define and mine orebodies. Its main products are drilling fluids, drilling optimisation technology and rock-knowledge sensors.
The well-run Imdex has done a terrific job adapting its business model towards higher-margin SaaS products and relying less on commodities drilling fluids. That has made Imdex more profitable, boosted its earnings quality and attracted a higher valuation multiple.
I like Imdex’s long-term potential to move further into mining-production technology and reduce its reliance on more cyclical exploration projects. To this end, Imdex is developing Blast Dog, a suite of products involved in blast-hole drilling.
It’s early days for Blast Dog, but the technology has real potential. The products target a large market and, if successful, will take Imdex further into the production phase.
In addition to organic growth through product innovation, Imdex continues to grow through acquisition. Imdex this month completed its acquisition of Devico AS for $324 million. The Norwegian company is a global leader in drill-site technology.
In the short term, Imdex should benefit from continuing strong demand for mining technology. At its interim result for FY23, Imdex in February said exploration budgets worldwide generally remain strong and noted that resource companies remain well-funded for exploration programs, judging by capital raisings.
In spite of this outlook, Imdex has fallen from a 52-week high of $2.99 to $2.09. It’s hard to reconcile the extent of that fall with Imdex’s operational progress or growth prospects. Like many small-cap tech stocks, Imdex has lost favour this year.
A price target of $2.76, based on the consensus of nine analysts, suggests Imdex is undervalued at the current price. The consensus target looks reasonable, but it might take time to get there in these volatile market conditions.
Chart 1: Imdex
Source: Google Finance
- RPM Global Holdings (ASX: RUL)
Like Imdex, RPM Global Holdings has had a tough time on the market. From a 52-week high of $1.95, RPM has fallen to $1.44, amid general weakness in tech stocks.
RPM provides a range of advanced mining software in asset management, scheduling, mobile technology, data, sustainability, mine-life optimisation and other areas.
Since its launch more than 50 years ago, the Brisbane-based company has been a key player in the growth of Australia’s Mining Equipment, Technology and Services (METS) sector. RPM has 22 offices worldwide and its products are used in 125 countries.
In its half-year result for FY23, RPM reported 13% growth in net operating revenue to $43.4 million. Underlying earnings (EBITDA) of $5.3 million for the half were up 26% on the same half a year earlier.
However, RPM lowered its total revenue guidance for FY23 from $101 million to $96.4 million. Hiring difficulties in a tight labour market affected revenue in its Advisory division and greater use of sub-contractors added to costs.
RPM reaffirmed its EBITDA guidance of $14.2 million for FY23.
The shares fell on the news, principally on the downgrade to revenue guidance. RPM is far from alone in dealing with a tight labour market. The “war of talent” in software and other markets will remain a problem for some time. But RPM still has a plenty of momentum through acquisitions, product innovation and overseas expansion.
RPM is barely covered by stockbroking analysts, which is not unusual for a company capitalised at $328 million. But that’s also an opportunity for eagle-eyed investors in microcap companies.
Of the two stocks, I prefer Imdex at the current price. I want to see RPM hold its price around these levels – an area of previous support. If it breaks that support, the next stop on the price chart is around $1.30.
Chart 2: RPM Global
Source: Google Finance
Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at 15 March 2023.
