Mining Services

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Boart Longyear shows there’s more money to made in mining services
THE AUSTRALIAN OCTOBER 25, 2014 12:00AM

Mining services companies have experienced falls of some 80 per cent plus this year, including those operating in Queensland’s coal seam gas space such as Titan Energy and WDS. But this week, drilling services specialist Boart Longyear rebounded 50 per cent.

Are there buying opportunities in mining services, or should investors stay well clear of a sector that has blown up even the most cautious? We think there is more money to be made, but it’s worth looking at the reasons for the resuscitation in Boart’s share price.

Having looked at it closely from July, Under the Radar Report’s portfolio manager, The Idle Speculator, placed a spec buy on Boart at 14c in mid-September. Nobody knew there would be a white knight, but we knew that without finding an answer to its $US585 million ($670m) of unsecured and secured notes, the company was doomed. The fall cannot be understated. This was a company capitalised at $4 billion just after listing in 2007.

In mid-September, The Idle Speculator noted, “its share price assumes a dramatic recapitalisation will occur”.

So the first big reason for the share price spike was a white knight in the form of private equity group Centerbridge. The deal done by the New York-based firm effectively removes the bank debt, which would almost certainly have blown up the company in the next 12 months. It is also providing much needed non-interest paying debt capital to partly pay the $US300m of secured notes and equity capital, which could lift its shareholding to about 41 per cent.

The real question to ask about Boart Longyear is why Centerbridge has stepped in. Private ­equity is not known for its altruism. There are plenty of mining services companies whose share prices are under pressure because of the short-term contractual nature of revenue streams, combined with pressure on their customer base to cut costs. But not all are of Boart Longyear’s quality.

Centerbridge knows it is the survivors that will make equity investors multiples on their money. The group’s funding is designed to kick the debt can up the road for between two and four years, in anticipation that the resources cycle turns upwards.

Boart Longyear might have been listed for only seven years, but according to the company, it has been around for 125 years. There is a lot of credibility in a company that has survived that long and is run by Richard O’Brien, previously in charge of gold giant Newmont Mining.

The Newmonts of this world are now running down gold reserves, but this can’t go on forever, or even much longer. Whether it’s 2015, 2016, or 2017, people will start drilling again, and when they do, Centerbridge has done a lot to ensure Boart will be there.

Not all mining services businesses will survive, but some, with far fewer financial problems than Boart had, are trading at well below embedded values. Under the Radar is looking closely at unearthing the next Boart Longyear.

Richard Hemming is an independent analyst who edits www.undertheradarreport.com. au. He does not own shares in any of the stocks mentioned.
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