Takeover Targets: Australian Mining Services DEALTALK

By Michael Flaherty and Tom Miles

Riding the commodity boom but struggling with costs, the mining services industry looks headed for a batch of takeovers.

While the sector is no stranger to acquisitions, slowing growth has buried stock prices of many companies this year, making them more affordable to prospective buyers.

One deal already under way is a 436 million Australian dollar, or $418 million, hostile bid by the Australian construction company Macmahon Holdings for the mining and utilities contractor Ausdrill. Macmahon is looking to bulk up as its principal mining customers also merge.

Imdex, a drilling supply company; Emeco Holdings, a heavy equipment company; and the engineering firm GRD are among other companies cited as top takeover candidates in a research note by Austock analysts.

GRD shares had dropped nearly 60 percent in the past three months to its close Wednesday, Imdex had shed nearly 30 percent and Emeco had eked out a 3 percent gain.

Austock also sees smaller targets in the mineral testing company Ammtec and the construction company Brierty.

Consolidating the Australia-centered mining services group would give it enough scale to handle contracts from the new crop of recently merged mining giants.

Private equity firms have also taken notice of the industry, attracted by its steady cash flows, low valuations and indirect exposure to the commodity price boom.

“We continue to look for investments in areas linked to natural resources, such as mining services,” said Daniel Carroll, managing director in Hong Kong for the U.S. buyout giant TPG Capital.

Carroll, speaking to delegates at Boao Forum’s International Capital Conference in London last month, mentioned steel and coal as areas he was interested in.

Commodity prices including iron ore, copper and coal are soaring on demand from emerging economies in Asia. The Reuters/Jefferies CRB index, which tracks 19 commodity futures, is up 25 percent so far this year.

The demand has increased work for the consulting, engineering, transport, drilling and logistics companies.

Consultant Metals Economics Group expects global nonferrous mining exploration spending to raise 25 percent this year to $13.1 billion. But the increase in business has not always translated into a bump in stock price for the service companies.

“Not all of them have managed to make money in the mining boom thus far because they do have cost pressures – mainly manpower,” said Tim Goldsmith, global mining leader at PriceWaterhouseCoopers.

He said costs for the “three Ps” – people, power and procurement – were being pushed up, with a shortage of skilled and unskilled labor, high fuel costs and historically long lead times on mining equipment orders.

Examples of big mining mergers include Xstrata buying the Canadian nickel producer Falconbridge in 2006. BHP Billiton is trying to buy rival Rio Tinto for $170 billion.

Boart Longyear, a drilling services company based in the United States, was bought by private equity in a deal others would like to copy.

Boart’s management teamed up with Advent International and Bain Capital to take it private from the mining giant Anglo American in July 2005. A consortium led by Macquarie Bank bought 50 percent in September 2006, valuing the company at 547 million dollars.

When they listed the company in April 2007, they raised 2.35 billion dollars, the biggest flotation in Sydney for a decade.

In Austock’s analysis, key takeover factors were operations in niche markets, low valuations, profit disappointments for still attractive businesses and synergies with a possible acquirer.

“Consolidation to date in mining services has been focused on unlisted companies,” said the Austock note, published earlier this month. “The market price pullback has made listed companies better value and we expect further consolidation.”

Among the companies that makes Austock’s “takeover assessment table” was Boart Longyear. From January to April, its stock lost nearly half its value, before rallying to the low 2 dollar range in the past few months.

Originally published by Reuters.

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