Pinned straw:
Yes @mikebrisy "Materially" is the word, since the guidance is between $0 and 15 cents per share for FY2025 compared to 77 cps for FY24, however while their attractiveness as an income play is now gone, for now, they are doing exactly what I would want them to do given the opportunities they have to expand and their reluctance to issue more shares or take on debt.
While they've been as low as $10.50/share earlier today, the circa -5% fall as of when I took that snapshot at 1:44pm Sydney time (AEST) isn't too bad considering they might not pay any dividends for the next year. I think a -10% SP fall would be a reasonable response as the income oriented investors jump ship - especially considering the low liquidity of the company because of the reduced free float. But they could easily reduce by -25% in the short term. Not too fussed about the short term with this one though because they can bounce back quickly if there is any insto buying on weakness.
They look cheap at $10 to $11/share to me, and I'm sure to others who have done some work understanding this company - and the opportunity - as I know you have Mike.
I hold them because they are a great company that is very well run, and they were a growth PLUS income play - it's rare to get both in one quality package like this - so now they are going to be a growth play, and not an income play, however I don't think that is going to be forever.
Good management teams, especially well aligned ones with plenty of skin in the game, will use company funds to expand and grow whenever there are good opportunities to do so, and in other periods they will return a good percentage of their profit to their shareholders.
I saw this a few years back with ARB Corporation where they were paying out large special dividends about once every 5 years, but not since 2014, so it's been 10 years now, and during that 10 years ARB's share price has roughly quadrupled from around $11 to now over $41/share, so once they identified good opportunities to redeploy more capital back into growth, they did exactly that and it was reflected in their share price rising faster than it had previously.
SAXUM is definitely a good global growth opportunity for Lycopodium, particularly for getting a good footprint around South America through a trusted name there, and for LYL to be paying for 60% of that company using their own cash, without having to take on debt or having to issue more shares, is extremely positive in my view.
Also, the Reko Diq Copper-Gold Project in Pakistan is one of the largest undeveloped copper-gold projects in the world. Reko Diq is owned 50% by Barrick Gold, the world's second largest gold miner, 25% by three Pakistani federal state-owned enterprises, and 25% by the Government of Balochistan of which 15% is on a fully funded basis and 10% is on a free carried basis.
Reko Diq is nestled in the Chagai district of Balochistan, the largest district by area, with close proximity to the Afghanistan and Iran borders. The district is characterized by arid and semi-arid terrain with vast deserts, mountain ranges, and sparse vegetation. The desert includes the Ras Koh Hills and the Chagai Hills. The district has a sparse population due to its harsh living conditions. The majority of the inhabitants are Baloch, with a mix of other ethnic groups. Chagai faces numerous challenges, including underdevelopment, lack of infrastructure, and limited access to basic services such as education, healthcare, and clean water.
The reconstitution of the Reko Diq project was completed in December 2022 — a key step in progressing the development of Reko Diq into a world-class, long-life mine which would substantially expand Barrick’s strategically significant copper portfolio and benefit its Pakistani stakeholders for generations to come.
Source: https://www.barrick.com/English/operations/reko-diq/default.aspx
Lycopodium are currently at the start of what could well become a major contract for Barrick at Reko Diq, possibly LYL's largest contract ever if they land the mill contract next year, and given the project's location, in close proximity to both Iran and Afghanistan, it is clear that LYL's risk management expertise and willingness to undertake work in some of the most dangerous locations across the globe has once again provided them with an opportunity to put themselves forward to do what they do best, being high margin EPC/EPCM work, and this time for a very large global company. Some people reckon this potential Reko Diq mill contract could be a step-change in scale for a company as small as LYL - i.e. small compared to their global peers. As I mentioned in my "Gold as an investment" forum post last night, Barrick also operate gold mines in Mali, so they're not afraid of risky locations themselves clearly.
And Reko Diq is just ONE project, of many that LYL are working on. LYL are currently contracted to do the Feasibility Study and the early works / phase 1 non-process infrastructure ($85m value so far) at Reko Diq however they are in the running to land the big contract for the mill design and construction next year as well, and they have plenty more tenders out there (with many different companies) that have not been awarded yet, as they mentioned in today's AGM presentation:
And that (above) is just Resources, their largest revenue driver to date, however they are expanding nicely into Industrial Processes and Rail Infrastructure, as shown below.
Their client list is impressive, especially the high degree of repeat work they get from the same clients, which indicates that despite their high margins they are maintaining a superb reputation within the industries in which they operate because the quality of their work is right up there.
Their outlook statement (below) is reasonably bullish, remembering that this is a company that likes to set low-to-realistic expectations and then try hard to beat them, and often do beat them, as seen by a series of guidance upgrades over the years, and very few guidance downgrades.
So, yeah, much lower dividend guidance was unexpected, but unconcerning. It means they're pivoting into a higher growth phase, and that's all good in my opinion.
The part I am struggling to follow with this update is why is NPAT lower than the preceding two years on stable to growing revenue. Cutting the divie to reinvest in acquisitions and working capital for projects is very sensible. Is the working capital cycle stepping up and it requires the cash from the divie and spending some of the previous FCF?
I'm just struggling to understand what is happening to NPAT, any thoughts on this anyone? This is a 10-20% reduction in EPS
@Slideup I think that it goes with the territory of being an engineer.
Within the portfolio of projects, some will outperform some will underperform, and of course I don't think we have visibility of the commercial structures involved and what commercial risk they take at the individual project level. (Does anyone who follows it closely know whether they've said much about commercial risk approach before @Bear77 @Rick? )
The relatively low P/E of an engineer accounts not only for the risk of the commodity cycle, but also for the margin risk in projects.
I could be wrong, but that's how I think about it. I'd need to see a longer term trend of declining margins to become concerned. On the contrary, their track record has been pretty good, and a dip down from reently elevated levels does not concern me in the slightest (see below).
I also wonder if, given the SAXUM deal, we might be seeing some conservatism in the outlook/guidance?
Hi @Slideup - yes, I think it's mostly extra initial capex required to add people and resources for some rather large projects such as that one in Pakistan that I discussed. They are very busy at the moment and judging from their commentary today they expect to get substantially busier.
If you look at the clients and the projects in that Orange ("Engineering/early stages") section - top third of that table - There are some big names there and some big projects, and additionally LYL do not, as a rule, discuss projects that they have tenders in for but have not yet been awarded, but based on today's commentary, I would be expecting some major contract awards over the next 6 to 9 months. I think they are preparing the market for reduced dividends because they do not want to take on any debt or to raise capital to gear up for projects they are hoping to or expecting to win, as well as those they are in the early stages of working on.
That's my take on it.
Plus they are funding that recently announced acquisition (60% of SAXUM) with their own cash and they may be expecting some capital expenditure as a result of integrating that into their business and trying to execute on opportunities that come with that. Because they have conservative management, they would not want to be running their cash balance down too low over the next year as these opportunities pan out.
The flip-side of all that is of course that in FY2026 and FY2027 when a number of the larger projects are either completed and/or at the commissioning phase, or projects are underway enough to be generating significant milestone payments, their cash balance will significantly increase, and that's why I believe that this FY2025 flagged lower dividend yield is more likely to be temporary than a permanent shift in strategy.
Thanks for that clarification @umop3pisdn GR Engineering actually suspended a dividend a few years back but they made up for it with larger dividends later. If memory serves, ARB Corporation did the same, during Covid, they declined to declare a dividend - yeah, just checked; it was the April 2020 interim dividend that ARB did not pay, but Covid was kind to them - their sales actually increased - so their final dividend for FY2020 (paid in October 2020) was 39.5 cps, equal to the previous year's interim and final dividends added together. But LYL have some optionality around their dividends now, without needing to scare the market later, because they've warned us the dividends could be considerably lower.
@Chagsy I don't know what their financial outlay is for each of their projects, however their track record as I understand it is that the client wears the risk financially and/or insurance, so where Lycopodium can't get insurance or the premiums are too high due to the locality, the client has to either insure the project themselves or provide compensation for out of pocket expenses that are outside of Lycopodium's control. LYL have been working in West Africa for decades and that Balochistan region of Pakistan is not worse than a few of those West African countries have been at various times.
One thing I have noticed is that sometimes LYL actually tender for jobs as EPM contracts instead of EPCM contracts - one quick example is Newmont's Ahafo North Project in Ghana in 2021 - see here: https://im-mining.com/2021/04/15/lycopodium-gets-epm-contract-newmonts-ahafo-north-project-ghana/
And here: https://www.lycopodium.com/wp-content/uploads/2021/04/Award-of-Ahafo-North-EPM-Contract.pdf
That means they were taking on the Engineering, Procurement and project Management, but not the Construction. In that example, LYL were later also contracted to do the Construction as well, so that project became an EPCM contract - see here: https://www.lycopodium.com/case-studies/ahafo-north-project/
Above: Ahafo North Project in Ghana, owned by the world's largest gold mining company, Newmont.
My understanding is that in that particular case, final approvals had not been granted yet - when the original EPM contract was awarded to LYL, so construction could not proceed, and once all the ducks were lined up (approvals all signed off), Lycopodium had "Construction" added to the contract as well, so it went from an EPM contract to an EPCM contract.
However sometimes the client elects to use in-country construction companies, and Lycopodium manage the construction but don't actually do the construction themselves - so one example of that is: https://www.lycopodium.com/case-studies/sabodala-massawa-biox-expansion-project/.
Sabodala-Massawa (above) is the largest producing gold mine in Senegal, located approximately 650 kilometres east–southeast of the capital city of Dakar and 96 kilometres north of the town of Kedougou.
Endeavour acquired the Sabodala-Massawa complex in February 2021, which included the Sabodala mill and deposits and the nearby Massawa deposits, the largest undeveloped open-pit project in Africa. Massawa is located within trucking distance of Sabodala, creating the opportunity for significant capital and operating synergies.
The integration and expansion of the Sabodala-Massawa complex involves supplementing the current 4.2 Mtpa carbon-in-leach (CIL) plant with a 1.2 Mtpa BIOX® (biological oxidation) plant to process the high-grade refractory ores from the Massawa deposits.
Following delivery of the Definitive Feasibility Study (DFS) and Early Works, Lycopodium was subsequently awarded the Engineering and Procurement (EP) and associated Project Management (PM) services, with project construction commencing in Q2 2022.
The new plant includes primary crushing, crushed ore stockpile and reclaim, grinding including pebble crushing, gravity gold recovery, flotation, concentrate regrind, BIOX® circuit, CIL circuit, detoxification circuit and gold room. The first gold pour from the BIOX® plant was achieved in April 2024.
--- end of website extract ---
There's plenty of other examples here: https://www.lycopodium.com/case-studies/
This is just one example of risk management. There's a lot less manpower required for EPM, or EP & PM, than there is for Construction, so if there is elevated risk in an area, LYL have form for passing on the actual construction when they choose to, and still doing the higher margin engineering, procurement and project management work.
At this point LYL are doing the FS (feasibility study) for Reko Diq and have also been awarded the Early Works Construction Engineering Services contract — with the scope of facilities including phase one village and associated infrastructure, establishing quarries, access roads, fuel storage, and other specific early works facilities - in short, mostly non-process infrastructure while the FS is progressed, before a Final Investment Decision (FID) by Barrick, likely in the first quarter of calendar 2025, followed by the Mill contract award, hopefully to Lycopodium.
See here: https://mining.com.au/lycopodium-lands-another-multi-million-dollar-reko-contract/
And here: https://www.lycopodium.com/wp-content/uploads/2024/04/Award-of-Reko-Diq-Early-Works-Construction-Engineering-Services_-Announcement.pdf [15-April-2024]
So, not their biggest contract yet, but once they've completed the FS (due by the end of next month) and the project gets the final green light, then there is potential there for LYL to be awarded the EPC, EPCM or EPM (/EP & PM) contract for the mill construction, which would likely be their biggest project ever if they land it.
That April announcement said: Lycopodium, together with the Barrick project team, is currently delivering the Feasibility Study (FS) for both Phase 1 and Phase 2 to support the NI 43-101 technical report, with the FS due for completion by the end of 2024. Basic Engineering [Early Works], being undertaken on Phase 1 of the Project [alongside the FS] and applying to the process plant and associated in plant infrastructure, is scheduled to commence in October 2024 and finish in Q2 2025.
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So far the FS & early works / non-process infrastructure construction engineering work is worth just $85 million to LYL - being what Barrick has already awarded to them - but the mill itself would be considerably more than that if they land that one.
I can't provide much more detail than that, but hopefully that helps @Chagsy
The following images are of the Reko Diq Copper/Gold project:
https://www.arabnews.com/node/2568449/pakistan
Tuesday . November 12, 2024 [Arab News, Pakistan]
Pakistan approves funds for new military operation, security for Reko Diq mining project
- Economic Coordination Committee approves Rs20 billion [US$71.7 million] for “Operation Azm-e-Istehkam“
- Also approves Rs1951.995 million [US$6.99 million] in security charges for FC Balochistan force for Reko Diq project
ISLAMABAD: Pakistan’s Economic Coordination Committee (ECC) approved funds for a new military operation and security charges for the Reko Diq mining project in southwestern Balochistan province on Thursday, signaling the government’s intention to conduct the operation despite protests from opposition parties.
Pakistan’s government announced in June that it would launch a new military operation titled “Operation Azm-e-Istehkam” or Resolve for Stability to root out militancy from the country. The decision was strongly rejected by the country’s major opposition parties, most of them based in the militancy-hit northwestern Khyber Pakhtunkhwa (KP) province bordering Afghanistan. Following protests, the government announced it would proceed with the operation only after building a consensus on the matter.
However, the ECC’s decision to approve Rs20 billion [$71.7 million] on Thursday in the ECC meeting chaired by Finance Minister Muhammad Aurangzeb is being seen as a sign the government intends to launch the operation.
“The ECC also considered and approved the following Technical Supplementary Grants,” a statement from the committee read. “Rs. 20 billion as a special allocation for Operation Azm-e-Istehkam during CFY 2024-25.”
The committee also approved Rs1951.995 million [$6.99 million] as security charges for the Frontier Corps Balochistan paramilitary force for the Reko Diq mining project.
Located in the Chagai district, Reko Diq contains one of the biggest undeveloped copper and gold deposits in the world, with the potential to produce a large amount of these precious commodities for decades.
The project is owned 50 percent by Canada-based Barrick Gold Corporation, 25 percent by three federal state-owned enterprises, 15 percent by Balochistan on a fully funded basis, and 10 percent by Balochistan on a free carried basis, according to Barrick.
However, Pakistani authorities have struggled to maintain law and order in the restive southwestern province bordering Afghanistan and Iran, where ethnic Baloch separatist outfits have launched an armed insurgency for decades.
Baloch militants demand independence from the state, which they accuse of exploiting the gas-and-mineral-rich Balochistan province and depriving its people of the resources. The state denies the allegations.
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There's a long way to go.
Hi @SudMav - LYL held their AGM this morning, but I was unaware of any conference call. The AGM was held in East Perth WA, and I am in Adelaide SA, so did not attend. According to their notice of meeting, there was no opportunity to participate virtually, and it wasn't streamed - see here: LYL-Notice-of-Annual-General-Meeting-and-Proxy-Form.PDF
So all of our discussions about Lycopodium today have been based on their AGM Presentation that they released to the ASX Announcements platform at 12:46pm Sydney time today.
The FY2024 results were an improvement on the FY2023 results as we noted back in August when they released them:
Their FY25 guidance at today's AGM was:
So a Revenue guidance mid-point of $352.5 million, better than FY24 and FY23, but NPAT down to a guidance mid-point of $42.5 million (from $50.7 million in FY24, and $46.8m in FY23), so that NPAT mid-point is 16% lower than the FY24 NPAT, and 9% lower than their FY23 NPAT, all shown above.
The DD on SAXUM would not account for that, but it may be a contributing factor. I believe that like many companies, LYL do run the ruler over potential acquisitions regularly, and we only ever hear about the ones that make it over every single hurdle and actually get announced as acquisitions.
I think as we have discussed, they are planning to spend more money this FY, and the benefits of that should flow through in subsequent years. They won't always go up in a straight line, but the overall trajectory is still north east as long as you zoom out and look at them over a 5 year rolling period, which is a good timeframe for an engineering contractor with a lot of lumpy one-off contracts.
It doesn't phase me - I'm actually pleased that they are planning to reinvest more back into their business this FY. When growth opportunities come along, they need to grab them and run with them, and if they can continue doing that without issuing any more shares, i.e. continue on as they have done for the past decade with the same share count every year - AND without any debt - they have neglible debt, just some lease obligations and they remain firmly in a "net cash" position as they have been for the past 10 years - i.e. if they can fund that growth through their own cash and cashflow, then that's just another reason why they are such a wonderful company and why I like them so much. They were my single largest real-money position before today, and they still are.
P.S. I sometimes wonder if LYL would have a go at taking over GNG as they are such similar companies with GNG doing mostly Australian work and LYL doing mostly overseas work, but it would have to be a deal that both companies would be happy to do as they both have such high insider ownership, and there is really no such thing as a merger of equals, so somebody wins more, and not everybody gets to keep their job if those two merge. It's not impossible, but usually seems unlikely. It's a strange situation - they seem to have a mutual respect for each other and they never work together, but I never hear of them bidding (tendering) for the same jobs (competing against each other) although that would have to occur since they both specialise in gold and copper mills.
Both companies are HQ'd in Perth. Both are small, outside of the ASX300. A merger would certainly make a lot of sense. However there are a lot of egos involved, plenty of people at both companies with heaps of skin in the game. I hold both of them, both here (they are my two largest positions here) and in a real money portfolio. LYL is bigger, so if they were to merge it would be via LYL acquiring GNG. May never happen, but it doesn't stop me thinking about it.