Starting with one rig on the Kalgoorlie fields in 1987, Ausdrill (ASX: ASL) now has over 6,000 employees, mainly in Africa and Australia. It is one of the better mining industry stories, and has successfully dealt with many challenges and downturns over the past 26 years.
Now another resources downturn is well underway and Ausdrill shares have fallen 80% from their 2012 highs. Oversold? This Fool thinks so; let's have a look at the reasons.
- Ausdrill is in the process of streamlining operations, reducing costs and paying down debt.
- The balance sheet is clean – no off balance items, no operating leases on plant & equipment. Gearing is 38%.
- 68% of Ausdrill's revenues are delivered from non-discretionary production expenditure. That is, established mines doing what they do – producing and shipping ores. This is a far less volatile source of income than exploration activity. The strategy is to increase this percentage.
- Ausdrill's major contract exposure is to iron ore, copper and gold. With iron ore, nearly all of the contracts are with low cost producers BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO). With gold, the majority of the contracts are with low cost producers.
- Ausdrill is a fully integrated company, sometimes being the only mining services company on site. Ausdrill is also involved in contract mining (Africa), equipment hire, manufacturing (drill bits etc), supply & logistics and some small ancillary concerns – keeping things in the loop.
- Cashflow is strong, enabling ample provision for working capital and the gradual repayment of debt. From the latest accounts interest cover is 9 times.
- Customers are fairly diversified by geography and size, reducing dependence. Major customers include AngloGold, BHP, Fortescue, Newmont and RIO.
What do projections tell us?
At present Ausdrill shares (85c) are sitting at levels briefly seen in the global panic of 2009. Earnings per share in the financial year (2013) just ended are expected to be 35c – however this is now irrelevant. Allowance for a further 25% decrease in profit for 2014 and a small improvement in 2015 gives us the following:
2014 earnings per share 26c; price earnings ratio 3.3; dividend 11c; dividend yield 13% (fully franked)
2015 earnings per share 28c; price earnings ratio 3; dividend 11c; dividend yield 13% (fully franked)
Foolish takeaway
As Fools know, the best time to buy is when the cannons are firing at you – this is certainly happening with Ausdrill and other mining services. However timing is one thing, making the decision to buy another. There is real fear and loathing toward this sector! Regardless of poor sentiment, Ausdrill is well positioned in the essential services sector when it comes to producing mines, it stacks up reasonably on the financials, it has a wide spread of customers and it's leveraged for any recovery.
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More reading
- Good news for RIO shareholders
- Iron ore climbs to highest level since May
- BHP to automate iron ore operations
Motley Fool contributor Peter Andersen owns shares in Ausdrill.
