Nice post Hanabi... some thoughts below:"– Barminco Proforma...

Nice post Hanabi... some thoughts below:

• "– Barminco Proforma EBIT up 64.8% on PCP" - sounds great
• "EBIT $12.9m" - not too bad.

But:

1. EBIT of $12.9m was on $141m revenue, so that is a margin of less than 10%; in a downturn that will quickly go to zero or negative, IMHO.
2. Note this: "Financing costs, net ($10.8m)". So Barminco appear to have large borrowings costs of close to $11m. Subtract that from EBIT and we
3. 're left with a measly $2.1m profit, on $141m of revenue. And last year's borrowing cost was $11m for the same quarter, so borrowings are not reducing, and we can thus expect around the same costs for future quarters.

Looking at borrowings:"Total liabilities $614.9m", including "Borrowings $489.1m", so that explains the large quarterly interest payments of over $40m per year. Seems they're paying close to 9% interest on their borrowings. And last year's borrowings were $479.5m, so they are not being paid down. How can they pay it down, with only $2.1m profit for the quarter? And in a downturn with decreased revenue and margins, we all know what happens.

This an important point regarding the borrowing levels and costs.  I see these as risks and headwinds to the business.  Assets have gone up in PPE although current assets have fallen slightly, liabilities levels remain unch except in their make up.  Positives here are they have financed the increased PPE to run and grow the business from cash and haven't added considerably to the debt pile. However the debt pile is rather large and burdensome.

The notes on borrowing provide some better insight into the make up. 

The overall borrowing levels have decreased slightly and importantly the interest on these is the 6% range - down from 9% so it could be worse.

Please see link below for further info.  The main point is management has been making efforts to improve on this position which is where some attention needs to be in the good times as it will likely need room to add debt in the future when the cycle turns.

https://thewest.com.au/business/mining/barminco-closes-us350m-debt-deal-ng-b88444431z

More to the point efforts being made below:

There is also this strange entry in the quarterly:

• "Share of profit from equity accountedinvestments, net of tax $7.4m"

This is the profit from 50% AUMS  

Cash from operating is up slightly which is another positive and they have added to their total equity value in the year.  Investment in PPE is up which I see as positive and financing costs are up but this includes $2.1mil in one-off transaction costs.  I am comfortable with their cash flow statement.

All in all I see Barmino as a net positive for Ausdrill however they are both carrying large debts so how they pay and refinance debt will be a large factor in their overall profitability.  They appear to have strong market positions with good projects and are currently profitable when they need to be at this point in the cycle.  If you want exposure to the mining services business then Ausdrill is as good as any in my opinion.  They stick to what they know (ie. RCR) and time will tell what the new management team can do to keep this business turning over profits for the shareholders.  I would like some dividends while I hold but given the debt I would much prefer repayments or adding to cash balance.

Note I am an accountant and have worked in mining services business previously in Australia, but as always DYOR and best of luck to holders or potential holders.  I always try and at least quickly review the notes to the financial statements and keep realistic expectations of what margins can be obtained in different type of businesses.