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Tim Treadgold
On December 11, 2018
“Tim Treadgold: Let’s revisit Ausdrill’s last big sell-off
History never repeats exactly but there is a curious parallel to be found in the recent share-price slide of Ausdrill (ASX:ASL), Australia’s biggest pure-play mining services business, which did something similar six years ago before surging sharply higher.
Back in 2012 Ausdrill, which provides a full suite of mine services from exploration drilling to underground mining, started a fall which eventually saw its shares drop by a bruising 95% between its high that year of $4.02 and a low in early 2016 of 20c.
The cause of that collapse was the retreat by Ausdrill’s mining company clients in the years after the end of Australia’s most recent mining boom.
With the mining and exploration revival of the past few years Ausdrill has been one of the big winners with the company’s share price rocketing up more than 1000% from that 2016 low of 20c to a high earlier this year of $2.73.
Cyclical patterns have always been a feature of the resources sector as the basic economic forces of supply and demand create shortages and then surpluses with equilibrium a rare status.
Investors who understand the cyclical flows of commodities can also see that sometimes an imbalance develops and while it would be a brave speculator to say that Ausdrill is repeating history, there are connections and contradictions that cannot be ignored, including the 50% fall in the company’s share price since May.
Overcooked?
Part of that fall might be explained by the retirement earlier this year of the company’s founder and driving force, Ron Sayers. Part might be explained by the recent merger with underground mine specialist, Barminco, and part by a recently completed $250 million capital raising.
But there is also a very real sense that the sell-off has been overdone and while the China v US trade war is a threat to global growth (and demand for minerals and metals) the exploration and mining industries are performing well, and it’s in their strength that Ausdrill makes its money.
One of the contradictions which makes Ausdrill’s share price retreat harder to explain than that of six years ago is the latest exploration expenditure data from the Australian Bureau of Statistics which showed a 3.6% increase in the September quarter to $561.4 million, up 25.7% on the September quarter of 2017.
The two commodities which dominate Ausdrill’s sales revenue by commodity, copper and gold, are also attracting high levels of exploration spending by the miners. Potential weakness, though, is heavy reliance on work in Africa and the contractors’ traditional challenge of having to continually seek fresh opportunities as contracts end.
It was exactly 12 months ago that
* last took a close look at Ausdrill in what was, for a few months, a timely analysis with the stock trading at $2.26 on its way up to that May peak of $2.73, a 20.7% gain over five months – before the latest downward turn of the cycle.
Because of its deep exposure to the mining industry Ausdrill is effectively an industrial proxy for resource sector activity; the busier the explorers and miners the greater the demand for drilling, blasting and mining services.
Right now, despite the trade war, there is no sign of the sort of almighty crash that came in 2012 when a boom morphed into a bust.
It’s complicated
The reason for being confident that there isn’t a mining crash on the horizon is that there has not been a boom; if anything there are signs of commodity shortages developing because there has been limited investment in new mines since the traumatising events after the last boom/bust.
So, if there isn’t a boom and there isn’t a bust, why have Ausdrill’s shares fallen by 50% in just six months?
The answer lies in a combination of factors that include the contractor’s challenge of always having to find fresh work, senior management succession after the retirement of Sayers, bedding down the Barminco merger and absorbing the $250 million capital raising.
None of those issue is a show-stopper for Ausdrill and while the company is not well researched by big-named investment banks there was an interesting report last week from Melbourne-based Wilsons which picked up on the points being made in this story, especially the oversold argument.
“Recent share-price softness overlooks a vastly improved Ausdrill business post the merger with Barminco,” Wilsons said.
“Now possessing a higher-quality earnings stream, lower risk profile, with strong levers of growth and a profitability profile (higher margins) vastly superior to its peers.
“While the macro tailwinds are favourable, Ausdrill can also benefit from being the dominant domestic drilling business, with contract mining operations supporting earnings over the medium term.”
Wilsons is forecasting Ausdrill’s net profit to rise by 65% from $61 million last year to $100.9 million in the current financial year, with a steady dividend of 7c a share on the enlarged capital base.
The share price is expected to rebound as investors warm to Ausdrill without Sayers, with Wilsons seeing a 12-month target of $2.40, up an eye-catching 85% on the stock’s last sales at $1.30.
Tim Treadgold’s The Explorer column appears weekly in *.
Tim is a Perth-based finance journalist who has been covering the resources sector for more than 40 years for national and international publications, long enough to know what’s gold and what’s fool’s gold — of which there’s quite a bit in the mining world.”
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