For the record drilling competitor, Mitchell Services (MSV) announced excellent results today and flagged an on market buy back and a capital return by way of special dividend.
“Mining services sector ripe for M&A, says EY By Peter Ker
Updated Nov 20, 2018 — 4.49pm, first published at Nov 19, 2018 — 3.07pm
A buoyant resources sector is breathing life back into the mining services sector and could trigger a wave of exits from private equity players who have been holding equipment fleet and other mining services assets since the last boom, according to accounting firm EY.
Analysis of auction results suggest the value of Australian mining fleet had increased by 7.5 per cent over the past 18 months, with the bulk of that valuation rise coming in the past six months as cashed up miners seek to add extra equipment or upgrade their existing fleet.
The financial health of mining services companies tends to be even more volatile than the cyclical industry they service, and EY said the recent strength in commodity prices and mining sector profits could trigger a wave of corporate activity among mining services companies.
Don't expect mid-tier miners to follow their bigger rivals into automation. Brendon Thorne
"Signs are already appearing in the market with deal activity amongst mining services companies increasing in the last 18 months," said EY in a report.
"A large number of mining services companies remain in the hands of private equity [PE] firms and have been held for a considerable period.
A few have managed to sell their mining services companies in recent transactions. We anticipate PE firms will be looking to offload these investments opportunistically and in accordance with their investment mandates as the mining cycle turns."
Price expectations reasonable Allegro Consulting is one example of a private equity player in the mining services space.
"We believe that long-awaited industry consolidation to drive scale and diversification is upon us. The capital required to invest in new and advanced equipment and the capacity to provide a skilled workforce are significant barriers to growth in the mining services sector," EY said.
"We understand that rental rates are improving, albeit they remain well off the heights seen in the mining boom towards the end of 2013.
"However, in the absence of price undercutting that was prevalent in a previously oversupplied market, equipment that is currently available for hire is likely to achieve more favourable pricing and contracting terms than has been the case in recent years."
Mitchell Services has done drilling for big miners like BHP, Peabody and Evolution Mining, and chief executive Andrew Elf said price expectations across the sector were reasonable given the extremely tough times encountered just a few years ago.
"We are still in the early stages of the cycle and we will see more mergers and acquisitions activity. Many mining services companies and in particular drillers had near-death experiences in the last cycle or have no succession plans and very reasonable price expectations at this stage in the cycle," he said.
"As general market conditions have continued to improve, utilisation rates have increased significantly, which absorbs idle second-hand equipment and increases its value.
"As this plays out, we are approaching the crossover point where investment will move into new equipment."
National Group is one such mining services firm rumoured to be considering an IPO next year, and managing director Mark Ackroyd said miners were preferring to rent rather than buy at the moment.
"Commodity producers have learned the lessons of the downturn and are increasingly looking at renting mining equipment to keep a lid on their fixed costs," he said.
"We have found there is a real growth opportunity by providing the scope and scale of fleet to allow mining companies to expand and still maintain some flexibility of operations and cash and capital management."
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