Going for Gold
On a rolling 12-month basis, integrated mining services player, Ausdrill Ltd’s (ASX:ASL) share price has been up over 106% following the resurgence of the mining sector along with a mix of developments, steady deal making and some changes at the top. That aside, we also report on its recent financial performance to track its year-on-year changes.
Recap
The last time we covered Ausdrill (ASX:ASL) was back at the end of May 2017 where we provided updates on the latest operating developments at the time as well as a brief discussion of its most recent financial performance.
A quick recap for Members, Ausdrill (ASX:ASL) is a diversified mining services company that provides contract mining, grade control, drill & blast, exploration, mineral analysis, procurement & logistics to major mining companies in both Australia and Africa. In a nutshell, its fortunes are tied to the performance of precious metals and the mining sector.
Getting some grub
That said, since our last coverage, there have been quite a number of developments over the past months. The focus of today’s report, however, will be the most salient ones starting with the Company’s “drilling for equity arrangement” or colloquially known as grubstaking to Golden Rim Resources’ (GMR) exploration activity in its Kouri project in Burkina Faso.
“Grubstaking” occurs when a miner is strapped for cash while needing to continue its drilling operations and offers up its own shares or a portion of its profits from the project to pay back the driller (in this case, Ausdrill).
This deal was originally announced on 20 November 2017, which saw GMR pay a mix of cash and shares on a 50:50 basis to contract Ausdrill to drill the remaining 7,500 metres out of the 15,000 metres (the other half was done by a separate drilling contractor) to allow a maiden resource mineral declaration by the first quarter of 2018. Pictured below is the location of the mine as per GMR’s report.
Source: Golden Rim Resources
Since then, as of 12 April 2018, GMR has announced that they will issue 11, 656,143 shares at an issue price of $0.035 for a total consideration of $407,965.01 after receiving its approval from its shareholders. The remaining amount, though, hasn’t been confirmed but may likely reflect a mix of cash and shares.
Over the past year or so, along with the resurgence of mining activity, we are positive with the Company’s push towards grubstaking as an important part of its business model, as it also leads to cross-selling of its other services such as logistics, engineering among other things.
Golden Years
Moving on, the second most salient update since our last coverage was the Company’s announcement in early February that founder and managing director Ron Sayers (pictured below) will retire after over 30 years of service.
He has given his 12 months’ notice with his intent to retire while also noting that he would remain in position during the transition to the new successor. Mr Sayers, in a candid statement addressed to stakeholders said:
“I’ve given the Board a long notice period so that there is plenty of time to find a new Managing Director who will take Ausdrill forward for the next chapter. This also means there will be plenty of time for me to get around to have a beer with as many of you as possible and chat about ‘the good old days’ before I finally hang up the boots.”
Mr Sayers originally planned to retire in 2014 but had ended up staying given the mining downturn at the time and has since steered the company back from its extreme lows in 2016.
Image Credit: Louise White of Kalgoorlie Miner
Some three weeks after the announcement, Mr Sayer has also decided to sell off his 10.3% stake in the company (~37.3m shares) for a total consideration of $101.45 million to a number of institutional investors.
That aside, it’s was only recently that the company provided 1H18 numbers, and given that our previous focus was on the 1H17, we believe that now is a timely and a good comparison period to track the performance since then.
1H18 Performance numbers
Starting from the top line, given the strong momentum the company is benefitting from a string of new contracts, Revenues at the group level increased by 17.9% year-on-year to $439.7 million, with all core divisions delivering increased or stable revenue.
Since the start of the interim period, the Company has secured over $400 million in new contracts as well as contract renewals/extensions which we believe underpin revenue growth. A sample of the contracts include extensions with Evolution Mining’s Mungari project, AngloGold Ashanti’s Iduapriem gold mine in Ghana and Resolute Mining at the Syama project in Mali among others.
During the presentation, Mr Sayers also noted that Africa’s growth prospects are strong citing that “Tendering activity remains at record levels due to the vast number of opportunities for new projects in Africa. We expect this will translate over time into contracts for both our African Mining Services team as well as our African Underground Mining Services (AUMS) joint venture.”
That said, including AUMS figures, Revenues for the year increased significantly by 22.2% year-on-year to $506.3 million contributing $66.5 million (+61.4% yoy).
Source: 23 February 2018 Company Presentation
Moving on down, the Company’s rationalisation efforts led to EBITDA margins increasing from 15.7% in the prior corresponding period to 18.9%, bringing EBITDA to $92.2 million or up by 40.6% year-on-year compared to $65.6 million in the prior corresponding period.
Breaking it down, the primary drivers of the increase in EBITDA were the growth in the African surface and underground mining portfolios which saw significant ramp up from the recently signed four new mining projects. Other factors that improved margins include increased demand for equipment rental and parts, better portfolio performance in the drilling business, as well as the non-recurring $5.3 million claim settlement and favourable exchange movements.
However, if we factor in AUMS, which is more profitable considering that it is less capital intensive and niche effects saw EBITDA grow 43.3% year-on-year to $104.4 million with the EBITDA margin hitting 19.6% (excluding the $5.3m settlement).
Next, EBIT increased from $33.9 million to $57.9 million or by 70.9% year-on-year. Given the improvements noted above, this translated to a higher EBIT margin which increased from 7.2% in the prior corresponding period to 11.1%. However, including AUMS, EBIT surged 68.6% year-on-year to $61.9 million with EBIT margins (excluding settlement) of
All in all, given the strong momentum gains in the year, Net Profit After Tax (NPAT) which also factors in AUMS, likewise surged ahead, up this year by 168.4% to $35.3 million. Earnings per share of A10.31 cents were up 140.3% year-on-year with a full franked dividend of A3.5 cents declared.
Outlook 2018
Going forward, the Company’s outlook on the mining industry, especially gold, remains bullish (a view we share) especially with a mix of factors in its favour. In the nearer term, we observed a global flight to safety amidst geopolitical tensions thanks to US President Donald Trump and his spat with the Chinese on trade and foreign policy affecting Russian and Syria.
The Company’s growth in Africa also bodes well for its potential over the medium to longer term given the rise in tendering activity, ultimately leading to more business deals and contracts. All in all, management remains confident that FY18 NPAT will hit over $44 million, an uplift of 40% given the improving prospects and progress made thus far.
Summary
Since our last coverage of the company, there have been quite a few developments with many in its favour. This is evidenced by a strong showing on its 1H18 performance review, that aside, the company has also been making steady progress in Africa which is seeing significant tendering activity as of late.
With Ausdrill’s (ASX:ASL) share price currently trading at 18.2 times FY18 earnings and 1.8 times book value, and paying a prospective dividend yield of 2.8 percent, holding on to the stock remains prudent in our view. Accordingly, Ausdrill (ASX:ASL) will remain firmly held in the Fat Prophets Portfolio.
