My view is there is a second-order impact for a whole range of companies that feed off the resources sector to varying degrees. In Australia that is a reasonably large number of companies, not surprising. I sought (simplification i know) of bunch them together, mining services, specialised diggers, equipment rentals, manufacturing equipment and maintenance of equipment, and labour services etc etc. they can do well depending on the size of the market that the big guys (BHP RIO WDS et al) are not good at, ultimately if they keep growing they reach saturation, imo. sometimes that is years away, also depends on the big guys remaining not good which is a reasonable bet i suppose.

the specific company outcomes usually outweigh the resources' cyclical impact, but it does not always depend on the degree of each.

That is why i am a bit biased against these operators because i can see the story ending but I can hold them LBL i hold a spec position for instance.

The standard capital cycle is higher prices leads to higher capex which leads to lower prices and a capex bust. I think it would be pretty safe to assume these guys are pretty heavily levered to the mining capex cycle and the capex cycle is levered to commodity prices. It's not a great proxy if you want exposure to short run movements in commodity prices though, but it would work over a 2-3 year period if commodity prices are sustained. (I would love to know what the hell News Corporation is doing with LBL products)

Thanks for sharing your thoughts @Strawman @UlladullaDave @Solvetheriddle

Obviously LBL has its own particular factors affecting its fortunes. However judging from the 12 month charts below, it would seem to me that the market sees commodity prices as important when valuing LBL.

All very simplistic first order thinking, on my part. My question really is: Is there some logic in expecting LBL's SP to recover in line with commodities prices? Or am I just being naïve/simple?

LBL:

BHP:

FMG:

@UlladullaDave Mmmm Newscorp...Printing presses? A great question for the next meeting with management.

Good spotting.

Ahh yeah, printing presses would be it I guess.

The SP performance over the period from 2012-2015 when the i/o price collapsed is a pretty good yardstick of the exposure of the LBL business to mining investment, imo, and the SP. (it's not too pretty)

all else equal......

@Solvetheriddle Your comments ring true for me. You have put if far more eloquently than I could. Thank you.

I put together a chart that compares Laserbond's annual revenue against the average iron ore price for each financial year:

Eye-balling it seems to suggest there is some correlation, but how much is causation? Iron ore had a rough run after 2011 as you rightly point out @UlladullaDave , but revenues were flat for LBL over that period. And it grew revenues from 2021 to 2023 (significantly) over a period where iron ore again fell from a high.

Perhaps the relationship is more to do with market sentiment and expectation as opposed to direct business impact? Or maybe it's just that LBL is still a relatively small player and can still grow in spite of broader headwinds? And this only looks at Iron ore, and LBL services operators in other commodities (and even Newspapers!)

It's a tough one. But my only point is that I wouldn't base my investment case on commodity cycles alone -- not that anyone ever suggested that.

Just to caveat what I said above, that mining boom last decade was built on i/o which is why I referenced the i/o price over that period as a proxy for "commodity prices".

With that being said, if we look at operating income the relationship looks a lot more meaningful, imo...

It doesn't tell the whole story, but at the same time, I think it's significant enough of a swing factor that the business will look pretty ordinary when mining is a headwind not a tailwind.

Oh I basically agree @UlladullaDave

Would very much prefer the cycle be in their favour. And as you've shown operating leverage can be a b*tch when you're expanding for growth and revenue stagnates or dips.

My only real point is that I wouldn't trade Laserbond based on commodity cycle expectations alone (again, not that anyone was suggesting that)

@Strawman Your graph is pretty interesting and gives the discussion some depth ie: another angle to look at this.

You ask:

"Perhaps the relationship is more to do with market sentiment and expectation as opposed to direct business impact?"

My gut feeling is that this is the case. The market sees LBL's fortunes tied to the fortunes of their customers in the resources space.

Thanks @UlladullaDave @Solvetheriddle @Strawman for kicking this around a little. Cheers

The market sees LBL's fortunes tied to the fortunes of their customers in the resources space.

Do you think the market is wrong?

Here's another nice little engineering business, XRF, with basically the same earnings profile. When you can see the same pattern in a bunch of stocks that are in a similar orbit you have to be careful not to confuse business quality with the cycle. Plenty of people will though – and therein lies the opportunity!

100%

When the market confuses cyclical malaise for structural decline it can yield incredible opportunities.

Agreed @Strawman and @UlladullaDave - however, I wouldn't consider LBL and XRF to be an apples vs apples comparison - XRF is far more profitable, has better management, and is a higher quality business, IMO. XRF also have a much larger TAM that they already have a decent market share of, and still plenty of growth to come (as does LBL). XRF also have a superior business model with their consumables sales (recurring revenue) being such a large part of their revenue mix - the razor and blades model.

There are a bunch of significant differences, despite both companies servicing the same industries for the most part.

While XRF are the higher quality company today, by a decent margin, it could probably be argued that LBL have more mid-term and possibly longer-term upside potential - IF they can execute well enough and manage their own growth without stumbling too often.

To underline where the two companies are at right now, from an investor sentiment perpective...

however, I wouldn't consider LBL and XRF to be an apples vs apples comparison - XRF is far more profitable, has better management, and is a higher quality business, IMO.

And yet, despite these better attributes, it's fate on the backend of the cycle follows a very similar pattern. The point wasn't to make a qualitative comparison of XRF and LBL just that I wouldn't want to be in these stocks when the cycle turns.

Anyway, it's an interesting discussion. Thanks to everyone who participated.

Fair points @UlladullaDave . I would think that other than gold and other precious metals, the commodities cycle across most metals is more likely to turn up than down from here - as prices are quite depressed at this point, so the argument could be made that we're closer to the low point of the cycle than the top, however your point remains valid - getting out when the cycle turns could be a wise move. That said, LBL's clients do span a variety of industries, and an argument could be made that when times are tough, repairing and extending the life of your machine parts could look far more attractive than replacing them.

In XRF's case, they are always going to have revenue from metals and minerals producers who may even produce more when prices are lower just to keep the lights on, and it all requires testing, but it's true that low prices shuts down a lot of exploration and development, so XRF would see revenue declining from those guys.

In terms of cycles, I think now is a good a time as any to buy both companies, all things being equal, but I don't think all things are equal, at this point, in terms of their respective management teams and their ability to succesfully scale smoothly - in those respects I would hold XRF but not LBL.

That said, I hold neither in real money portfolios right now, and I only hold XRF out of the two of them here. I did hold both companies up until June in one real life portfolio.

Indeed. I was also about to say that XRF has a better business model and hence is higher quality, though I have more invested in LBL because of the valuation - of course, I missed the boat on getting XRF to an appropriate sizing at more attractive prices (sadly).

Left out Vysarn

Had an epic rally last couple of days. Must be the Iron ore prices driving it.

XRF is my largest holding now. Pretty scary having something so large that hasn't entered the main index. Was hoping it would be Data3 but anyway.

I think the only comment I can add to this great thread is perhaps we need to be careful going back to the 2010-2016 cycle and assuming that is the "normal" level of cyclicality for businesses like LBL and XRF.

With hindsight I think we can look back and label it a "supercycle" if not on the commodity price movements alone, then definitely the level of capex that exploded in the mining industry which led to the outsized revenue and profits for mining services companies.

Like other supercycles (such as the lead-up and aftermath of the GFC for financials) the scars linger for a VERY long time and we have seen that as capex has remain muted ever since:

Don't get me wrong, both of these businesses are cyclical but where we are in the cycle I don't know. This is where management becomes so important, trusting them to allocate capital well through the cycle and ensuring that when it turns the business is resilient enough to survive, and then thrive coming out the other side.

That's true @Wini

I did actually comment that that last cycle was not like a typical cycle, but when I went to edit it I somehow removed it.

That being said, if we just drill down to equipment, plant and machinery, which is perhaps a better approximate for LBL/XRF type companies, I think, then the difference is not so stark then versus now.