Buying into Barminco
Mining services company Ausdrill (ASX:ASL) has successfully raised $252 million via a share entitlement offer to its shareholders. The share entitlement was a one (1) new share for every 2.3 existing shares and had an issue price of A$1.47. Funds raised through the capital raising will be used to partly fund Ausdrill’s acquisition of the Barminco Group. The acquisition comes on top of the company reporting an excellent 2018 full year result. The following figure shows the combined operations of Barminco and African Underground Mining Services a subsidiary of Ausdrill:
Source: Ausdrill (ASX:ASL)
Ausdrill will issue 150.7 million shares to Barminco shareholders and cash of $25.4 million. With the assimilation of debt of $425.5 million and the cash and equity value of circa $271.5 million, Barminco Group is valued at $697 million. The vendors of the Barminco Group will hold around 22.1% of the shares in Ausdrill, post completion of the acquisition. The acquisition is expected to complete in October 2018. The Barminco acquisition is subject to Ausdrill shareholders approving the transaction, with the requisite meeting to be held on 25 October 2018.
Barminco is a leading participant in the underground hard-rock contract mining sector. Barminco generates revenue in Australia (68%) and Africa (30%) and the remainder in India (2%) and is diversified across gold (63%) nickel (24%) and zinc (13%). Barminco’s revenue profile does, we believe, dovetail Ausdrills’ offerings. Ausdrill already cooperates with Barminco through a 50:50 joint venture that generated $146 million in revenue. We consider the Barminco acquisition complements Ausdrills’ existing product offerings. Ausdrill expects the acquisition will be financially positive. Moreover, the additional debt to come from Barminco will lift the FY18 consolidated net debt to consolidated earnings before interest taxation depreciation amortisation to a modest 10.4 times.
The acquisition will lift Ausdrill (ASX:ASL) into second place behind THIESS on a revenue basis in the Australian mining services sector.
The following image shows the position of the combined Ausdrill/Barminco group (based on revenue) compared with its peers in the mining services sector:
Source: Ausdrill (ASX:ASL)
We consider the size achieved by the two combined companies in the mining services sector will bring with it the opportunities to tender for large scale mining operations. The combined companies will have the necessary capital to mobilise to large scale operations, as mining projects move up in size and operational complexity.
Barminco has evidenced a solid track record through the last commodity cycle downturn, by maintaining profitability and, albeit softer, revenue. The following table shows the pro-forma combined annual revenue and earnings before interest taxation depreciation amortisation (EBITDA) and earnings before interest and taxation (EBIT) together with the combined margin:
Source: Ausdrill (ASX:ASL)
It is the margin strength that the combined companies will generate, both past as shown above and going forward warrants, we believe, continued exposure to the enlarged company.
In the midst of acquiring Barminco, Ausdrill has released a very satisfying full year result for 2018, with its African operations leading the charge. Ausdrill printed a 96% increase in reported profit compared to 2017, to $38.7 million.
Driving the result was Ausdrill’s African Underground Mining Services joint venture operation (Ausdrill’s interest 50%). The following chart shows the units contribution to the 2018 result:
Source: Ausdrill (ASX:ASL)
Ausdrill (ASX:ASL) generated revenue through the Newmont’s Subika project in Ghana and work at AngloGold Ashanti’s Geita project in Tanzania. Ausdrill also garnished new work from SEMAFO at its Siou project and for Roxgold’s Bagassi project in Burkina Faso. These projects offer strong growth potential beyond 2019.
The balance sheet improved a tad despite the company’s focus on growth opportunities. This saw gearing move to 25.7% at 30 June 2018, compared to 26.0% from a year earlier. Debt in the balance sheet increased by $16 million from a year earlier to $404.6 million at 30 June 2018 with cash dropping by $29.4 million to $137.3 million over the same comparative period. We have no concerns around the current structure of the balance sheet.We note the company’s credit rating has recently been placed on a positive credit upgrade by ratings house Moody’s.
Turning to the charts, the technical picture has weakened this year, with a strong move back away from resistance at $2.75. That said the 200-day moving average (green line) has crossed above the 50-day moving average (red line) which is a positive event. Support at $1.56 has also been tested and respected.
Shareholders were the big winners in 2018, as the company lifted its full year dividend to 5 cents per share fully franked from the 4 cents per share fully franked dividend in 2017. On top of the ordinary dividend, the company paid a special dividend in 2018 of 2.0 cents per share fully franked. No special dividend was paid out in 2017.
On the monthly charts prices have corrected since late 2017 with the 61.8%, 50% and 38.2% Fibonacci retracements giving way at $2.75, $2.26 and $1.77 respectively. Support further down exists at $1.15. A recapture of the 38.25 Fibonacci retracement at $1.77 would improve the technical outlook.
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 with its FY18 results, that aside, the company has also been making steady progress in Africa. The Barminco acquisition will, we believe, accelerate the company’s critical mass in its key markets.
The mining sector has undergone an extended cost-out period, but, given the nature of mining operations is such that extraction and processing cannot be eliminated. This cost-out drive can therefore deliver opportunities to mining services providers with critical capital mass. The mining sector has, of late however, experienced a lift in tendering activity on the back of commodity prices that have risen from their lows of 2016. The acquisition of Barminco, and the 2018 result deliver favourable conditions for Ausdrill to leverage into these improving conditions in the mining sector.
Accordingly, Ausdrill (ASX:ASL) will remain firmly held in the Fat Prophets Portfolio.
