30-May-2024: FY24-Guidance-Update.PDF
I saw this sell-down as an opportunity and topped up GNG today both in my largest real money portfolio (@ $2.09) and also here on Strawman.com (at the $2.10/share closing price).
This is an engineering and construction company predominantly, although they do have recurring revenue through their Energy division (was called Upstream Process Solutions / Upstream PS, now called GR Production Services), so I view this downgrade in much the same way that I viewed the recent Duratec (DUR) guidance update.
Here's what GNG reported at the half (for the 6 months ending 31-Dec-2023):
And here's what they reported for FY23 and FY22 (full year results):
FY24 (full year) EBITDA now expected to be $50 to $51m ($50.5m midpoint), so lower than FY22, but +13.7% higher than the $44.4m EBITDA they reported in FY23, so they'll earn more than they did last year.
The market is reacting negatively to the revenue guidance downgrade - previously a midpoint of $515m, now $422.5m (midpoint), which is huge - if you take the lower end of the new guidance, which is $415m of revenue, that's $100m less now, or -19.4%. Using the midpoints ($515m to $422.5m), it's an -18% reduction in revenue.
And it would be significantly lower than FY22, when the reported $651.7m in revenue.
However, as I said with Duratec, that's revenue, let's look at earnings: The second paragraph of the announcement states that GNG continues to achieve solid operational performance across its core business (GRES - GR Engineering Services, a.k.a. their "Minerals Processing" division) and from its two key subsidiaries, GR Production Services (a.k.a. their "Energy" division) and Mipac (which now includes their recent Paradigm Engineers acquisition), and that all divisions are forecast to achieve EBITDA growth - by margin and percentage - in FY24 compared to the prior year.
So their EBITDA margins are improving. That is borne out by their new guidance of $50.5m EBITDA from 422.5m in revenue - giving them an 11.95% EBITDA margin, compared with FY23 where their EBITDA margin was 8% ($44.4m EBITDA from $551.4m in revenue) and their EBITDA margin of 8.6% in FY22 ($55.8m EBITDA from $651.7m in revenue) - as shown above.
Their Net Assets moves around that $60m mark, give or take about $2m, and their cash balance is very up and down because it depends on a lot of factors and the timing of various milestone and completion payments for both ongoing work and completed work, as well as outgoing expenditure when gearing up for new projects at various times. Importantly, GNG rarely carry debt - they almost always maintain a net cash position, which is very wise for a company of their small size and the industries that they operate in, in addition to the types of clients they work for, often it's GNG who get the contracts to construct the initial mills for gold miners who are transitioning from explorers to developers to producers.
As with Lycopodium (LYL), GNG get a lot of initial study work, so the Pre-Feasibility Studies (PFSs) which often lead to Bankable/Definitive Feasibility Studies (BFSs/DFSs). Both companies are involved in the scoping, initial testwork in most cases, the engineering and design of the plant in consultation with the client, and then if they are awarded the EPC (engineering, procurement & construction) contract or the EPCM contract (which includes overall project Management), they are then responsible for the final designs, the tendering and ordering of long-lead-time items (such as ball mills and large drive motors), and the actual plant/mill construction. Because LYL often design gold mills to be built in some of the most dangerous places in the world, such as some of the more risky West African countries, you'll often see them (LYL) announce EPM or EP & PM contracts, which is where they do everything EXCEPT the actual in-country construction; that work is usually subcontracted to a locally owned builder already operating in-country, so those contracts are either called Engineering, Procurement and Management (EPM) contracts or more recently the trend has been to call them Engineering, Procurement, and Project Management. GNG, on the other hand, work mostly within Australia, and they almost always do the "C" (construction) themselves.
Some of these contracts take months, such a mill refurbishment or an expansion or upgrade of an existing mill, however some will take years, such as the West Musgrave Mineral Processing Plant (nickel and copper) for OZ Minerals (now owned by BHP) - see here: GNG-Contract-Award---West-Musgrave-Project.PDF [14/04/2023] - which is worth over $300m (in revenue) and was expected to last around 2 years (so until around April/May 2025).
I did mention here a few months back that with the Nickel price tanking and BHP threatening to lay off hundreds of workers across their nickel operations in WA if they did not receive significant government support to carry them through until nickel prices bounced back, that the West Musgrave project could either be shelved or suspended, and that could definitely affect GNG because it was GNG's largest project at the time - here is an overview of their current Minerals Processing (GRES) contracted projects (as reported in Feb with their H1 results):
Source: HY24-Investor-Presentation.PDF [22-Feb-2024]
And here is the recurring revenue from their Energy (GRPS, formerly Upstream PS) division, along with the various contract lengths, which vary from 2 to 5 years, and are often rolled over (extended) at the end of those periods.
As you can see from those two slides, they are a small company that relies on a relatively small number of contracts to keep them busy at any given time, so their revenue can be lumpy for sure. Last night, GNG was a $364m company (bit smaller after today's SP drop), LYL was a $480m company, and Duratec's market cap was around $255m, so these are microcaps and none of them are in the ASX300 yet.
Since those slides were prepared in Feb, GNG have announced the following:
05-April-2024: Market-Update---Abra-Paste-Plant.PDF [Galena Mining Limited (G1A) reported that voluntary administrators had been appointed to Galena’s 60% owned subsidiary, Abra Mining Pty Ltd. GR Engineering was engaged in September 2021 to undertake the engineering, procurement and construction to relocate, refurbish and commission the Abra Mining owned Higginsville paste plant, which was successfully delivered and commissioned in accordance with the Contract, which included deferred payment terms. Prior to the appointment of the Administrators, Abra Mining has made monthly payments to GR Engineering in accordance with the applicable payment schedule in the Contract. GR Engineering notes the intention of the Administrators to operate the Abra mine and processing plant on a business as usual basis. The Administrators have confirmed that they will continue to pay the contracted monthly payments to GR Engineering. GR Engineering’s current exposure for remaining payments to be made by Abra Mining under the Contract is $8.5m representing unpaid deferred receivables. Given the deferred nature of the progress claims under the Contract, at the time of entering the Contract, GR Engineering sought and obtained first ranking security over the paste plant equipment and design documentation. This security relates to the paste plant only and does not extend to any other assets of Abra Mining. Based on GR Engineering's secured position, its preliminary assessment of the value of the secured assets, the intention of the Administrators to operate the mine and processing plant on a business as usual basis and the Administrators’ intention to continue to pay the contracted monthly payments to GR Engineering, GR Engineering expects that any adverse impact on GR Engineering's financial results for the financial year ending 30 June 2024 will be immaterial.]
18-April-2024: Appointment-of-Non-Executive-Director---Debbie-Morrow.PDF [Deb Morrow has over 25 years’ experience leading large-scale projects and has had a range of senior corporate and sustainability roles across the energy and mining sectors which includes a 20 year career with Woodside Energy Ltd and being a senior executive at OZ Minerals Ltd, prior to its acquisition by BHP in 2023. Ms Morrow is currently the MD & CEO of ASX listed Agrimin Ltd, who are focused on the development of its 100% owned potash projects in WA. Ms Morrow is a NED of Miner’s Promise and Holyoak.]
10-May-2024: GNG-EPC-Contract---Kathleen-Valley-Lithium-Backfill-Project.PDF
plus: LTR-Liontown-executes-Paste-Plant-EPC-contract.PDF
So not just gold. Lithium, copper, nickel, plus their energy division. Happy to be a shareholder of GNG, and thought today's drop was a good buying opportunity.
Today, another very similar company to LYL reported, GR Engineering Services (GNG), and despite having had BHP shelve the West Musgrave project (see here: Market-Update---West-Musgrave-Project.PDF) in July, GNG maintained their very high final dividend at 10 cents per share (cps) which means their full year dividends for FY24 (interim + final divs) adds up to 19 cps, same as FY23, and that means that at yesterday's closing share price of $1.855, GNG are paying a dividend yield of 10.2% and that's fully franked, so if you add in the full value of those franking credits (which I can use), the "grossed up" dividend yield is 14.3%. Again, this is another company (like LYL) who specialise in gold mills (so, tailwinds), have zero net debt, have high insider ownership (17% of the company owned by Directors and company founders and their families) and are conservatively run, but run well. They aren't growing as fast as LYL are though - they are smaller and have lumpier revenue and earnings.
GNG reported $74.6 million net cash, -13.3% lower than the $86 million they had at 30 June 2023, and their ROE is also very high at 47% (based on today's results), and it's been over 45% for the previous 3 financial years also according to Commsec, but the main difference in the eyes of the market appears to be that the market had lower expectations of GNG and GNG did maintain their very high dividend, so GNG is up today, currently trading just over $1.90 and they've traded this morning up to $1.95. I was buying GNG two days ago at $1.81 (average), so that's one thing I did get right this week (selling down Codan yesterday here on SM, not so much...)...
Like LYL, GNG is a highly illiquid stock where large volume trades can significantly move the share price, but unlike LYL who had a detailed and positive outlook statement yesterday, GNG's outlook statement was more, "We'll let you know in a couple of months.":
"FY25 Update and Outlook: GR Engineering has a solid contracted pipeline and has been building its orderbook for FY25 and future periods. GR Engineering intends to provide FY25 guidance at its 2024 Annual General Meeting, to be held on 27 November 2024, when it is likely to have more certainty in relation to the timing of key projects."
'Nuff said. Oh, except their EPS, earnings and margins were all higher, on lower revenue:
Source: GNG-FY24-Financial-Results---Media-Release.PDF
I hold GNG (third largest real life position, plus here also).
01-Feb-2024: GNG-Acquisition-of-WA-Based-Process-Controls-Business-(Paradigm-Engineers).PDF
GR Engineering Services Limited (ASX:GNG) announced this morning that its wholly owned subsidiary, Mipac Holdings Pty Ltd (Mipac) has entered into an agreement to acquire Paradigm Engineers Pty Ltd (Paradigm), a provider of control systems and electrical engineering, automation and technology services based in Western Australia.
Transaction Highlights
- This transaction enhances Mipac’s control system and electrical design capabilities and expands its existing footprint in Western Australia. Paradigm has significant expertise working across a range of commodities, including iron ore, gold and battery minerals.
- Paradigm is forecasting FY24 revenue of $16 million and an EBITDA margin % consistent with Mipac. Similar revenue is anticipated for FY25, supported by Paradigm’s current order book and pipeline. The combined Mipac and Paradigm business is expected to generate revenue of approximately $50 million on a proforma basis.
- Paradigm’s current management team have agreed to continue in their roles post-completion.
- The purchase price is $9 million, with 50% payable in cash and 50% payable in GR Engineering scrip, subject to voluntary escrow. It is anticipated that the transaction will be immediately earnings per share (EPS) accretive.
This is a small bolt-on acquisition that does NOT require a CR, and is immediately EPS accretive. All good! GNG don't do M&A very often, but when they do make an acquisition, it tends to be a good strategic fit, for a good price.
Paradigm Engineers | Control systems and electrical engineering company
GR Engineering - Global Mineral Processing Solutions (gres.com.au)
GR Engineering Services Limited - Mipac - Engineering Consultants and Contractors (gres.com.au)
Disc: I hold GNG shares (both here and in a real money portfolio).
GNG-1H24-Results.pdf (taylorcollison.com.au) [04-March-2024]
Plain Text: https://www.taylorcollison.com.au/wp-content/uploads/2024/03/GNG-1H24-Results.pdf
Below are screenshots of pages 1 and 2 - please click on the link above for the full report which contains disclaimers and disclosures on pages 3 and 4.
Disclosure: I hold GNG shares both here on Strawman.com and in a real money portfolio as well.
27-August-2023: I'd like to highlight the income and growth track record and future potential of a couple of smaller lower-liquidity microcaps that don't get talked about here much:
Firstly, GR Engineering Services (GRES, GNG.asx):
GR Engineering - Global Mineral Processing Solutions (gres.com.au)
GR Engineering: Providing Global Mineral Processing Solutions - YouTube [video]
GNG-FY23-Financial-Results-23-August-2023.pdf
GNG-FY23-Results-Presentation-23-August-2023.pdf
That presso (from last Wednesday) isn't overly long, however I'll shorten it even more by providing the 10 most important slides for current and prospective shareholders:
FY22 was a great year, and FY23 didn't quite hit those same highs, however FY23 was still a solid year and with negligible debt plus $86m cash in the bank (at June 30th), GRES (GNG) have matched FY22's high 19 cps dividend (for the full twelve months, so adding the interim and final dividends together). In terms of FY24, I'm more than comfortable that the good times are going to keep rolling on with GNG, based on their order book and track record (more on that order book in a minute).
Now, this company has three divisions, as shown above with some examples of their respective current clients. Those 3 divisions are:
- Mineral Processing ("GR Engineering", their main business which provides the majority of revenue and earnings, but the revenue is lumpy due to the one-off nature of the contracts);
- Energy ("Upstream PS", or "Upstream Production Solutions", provides recurring revenue from multi-year maintenance/operations contracts in the Oil/Gas sector); and
- Process Control Systems (Mipac, their most recent division, formed via the acquisition of Mipac in 2021 for just $21.4m max - being only $14.5m upfront - in cash and GNG shares - plus the other $6.9m being deferred subject to meeting EBITDA targets - which shows both how frugal and how smart GNG management are).
That "Mineral Processing" Order Book (confirmed orders) that totals over $650 million is enough by itself to beat both FY22's and FY23's revenue in FY24 (the current financial year), without ANY contribution from their other two divisions, or any further work added to the order book, including those near-term opportunities they mentioned, however it's likely that some of that (order book) work will extend into FY25, especially West Musgrave (for BHP), so part of that revenue will fall into FY25. Regardless, FY24 is going to be another strong year, and I believe they will continue to pay above-market dividends, both because they have the balance sheet (no debt and over $80m in cash) to do so, and also because they have perfect shareholder alignment. Check this out:
Yes, that's right folks, 56% of the company is owned by the company's directors and the company's founders (or their families as some of the founders have sadly pased away) and it's been like that for years, so there hasn't been much selling down of these insider positions at all. I find that when the majority of a company is owned by insiders, they tend to be rather focussed on total shareholder returns, particularly on paying out decent dividends when they can.
And they use debt much more wisely than other companies where management are just managers rather than part-owners of the business. With small companies, I prefer them to have no debt at all, and GNG Management agree, because they have what they refer to as "negligible debt" and over $80m of cash in the bank.
The free float (all shares on issue less those owned by insiders and instos) is notionally 27%, however most of that retail shareholder base isn't selling either, so it could become a lobster pot stock; easy to get into, much harder to get out of in a mad rush. So great for patient money, but perhaps not as good for money you might need to pull out quickly.
That's the last image that I've copied across from that Investor Presentation from last week (link above, near the top of this straw). This is a company with a market cap of around $372m (based on a $2.30 share price, where they closed at on Friday), with $86m cash (at June 30th), that's paying out some really nice dividends, and doing it consistently.
See below:
Source: Commsec
OK, nice dividends, all fully franked since March 2021, and a trailing yield of 8.3% plus the value of franking credits, so a grossed up trailing yield of 11.8% (including the full value of the franking credits) based on a share price of $2.30 (where they closed on Friday). I paid a fair bit less than $2.30/share for most of mine, but I think they still represent value at current levels.
But what about growth? Well...
Source: Commsec.
If you want to compare that to the index - here it is - and I've thrown in another similar company that is probably even better - Lycopodium (LYL):
Source: Commsec.
I've used the XAO there for a benchmark, the All Ords accumulation index, which includes all dividends and distributions reinvested back into the underlying companies, whereas the LYL and GNG lines ONLY represent the share price, without any dividends. You could also use the XJO - the S&P/ASX 200 TR (total return) index, however that is almost identical to the All Ords (the XAO) with the XJO returning +38.56% over 10 years (total, not p.a.) vs. the +43.07% return of the XAO. LYL has returned triple that, with +128.89% and GNG has returned +286.55% over 10 years, and that's of course without factoring in any dividends with GNG or LYL. Dividends substantially increase the total shareholder return - way beyond what that chart could show, except for the green line - the XAO - the All Ords Accumulation (or Total Return) Index - because with the XAO the dividends are already factored in.
So there you have it - great INCOME PLUS GROWTH. And LYL is even better, but that's another straw.
Disclosure: I hold GNG & LYL both here on SM and in my real life portfolios.
P.S. While they DO specialise in the design and construction of gold processing plants (gold mills), they also do other stuff, like Mineral Sands for instance:
03-May-2023: This announcement from GNG (who I hold both here and IRL) caught my eye this evening: Binding-Term-Sheet---Yangibana-Rare-Earths-Project.PDF
That's another contract win to add to their order book. Details: GR Engineering (GNG) have entered into a binding term sheet with Yangibana Pty Ltd, a wholly owned subsidiary of Hastings Technology Metals Limited (ASX: HAS) (Hastings), for the engineering, procurement and construction (EPC) of the beneficiation plant and associated infrastructure for the Yangibana Rare Earths Project (the Project) in Western Australia.
The Project is located approximately 250km north east of Carnarvon, in Western Australia.
GR Engineering and Hastings have agreed the material terms of the EPC contract in the binding term sheet. The EPC contract for the works will be finalised shortly and GR Engineering will commence early works. If the EPC contract is entered into, it is expected that the contract sum, including provisional sum, will be $210 million.
Commenting on the award, Mr Tony Patrizi, Managing Director said: “GR Engineering is pleased to have received the binding term sheet for this world class rare earths project in the Gascoyne region of Western Australia. It will be exciting to work on this project as it is focused on globally critical minerals that are used as key components for electric vehicles and wind turbines. We look forward to engaging closely with the Hastings team to deliver safe and successful outcomes for this project."
--- ends ---
Here's a link to the Hastings Technology Metals (HAS) announcement today: HAS-Reduces-Yangibana-Delivery-Risk---Awards-EPC-Contract.PDF
In their H1 results Presentation in February (see here: HY23-Investor-Presentation.PDF) GNG gave us an overview of the major projects in their EPC (Engineer, Procure & Construct) Order Book (on slide 5):
By the way, that West Musgrave Project ccontract (with OZ Minerals) has now been finalised - see here: GNG-Contract-Award---West-Musgrave-Project.PDF [14-April-2023 - Estimated revenue: $312 million over a two year period - I did mention here a little while ago that I thought that West Musgrave would be a Big contract for GNG when it was finalised.]
GNG are a bit like Lycopodium (LYL) in a number of ways - not just in what they do, but also in how they go about things, and they are both very modest - tending to underpromise and overdeliver most of the time. While LYL have been positively re-rated by the market in recent months, GNG have not: Here are GNG's 1 and 3 year charts:
Over 3 years they've done alright, but over the past 7 or 8 months... not so much... in share price terms. However there can often be a disconnect between the business value and the business share price with these microcap companies that aren't followed by the majority of market participants. As we have seen with LYL in recent months, when the market decides to positively re-rate them, they can put on quite a bit in a very short space of time...
I hold both companies (GNG & LYL) both here and in real life. Here is GNG's "Outlook" slide from their Feb Presso (H1 FY23 Results presentation, link above):
See what I mean - very understated. For context, here's their FY22 vs FY21 results:
With current guidance for FY23 Revenue in the $500m to $530m range, that's better than FY21 ($392.4m), but not as good as FY22 ($651.7m), however that "return to historical levels" for their EBITDA margin in the second half (current half) of FY23 suggests that the EBITDA margin will be more like FY21's 9.5% than FY22's 8.6%, and their margins have been higher than that in prior years.
They're tracking along nicely. Great dividend yield too. And their share price will recover at some point, sooner or later. Good income stock, with capital growth when it comes, just like LYL.
21-Nov-2022: I've just been looking through some recent announcements from GR Engineering Services (GNG) which is one of my favourite companies, and one that continues to pay me market leading dividends. Their trailing dividend yield is 8.68% based on their closing share price today of $2.19 and the 19c worth of dividends they've paid during the past 12 months, higher if you gross it up to include franking - their dividends are also fully franked). So income and some capital gains as well.
Here's some of their recent announcements, starting with their presentation on August 24th:
24-Aug-2022: FY22-Investor-Presentation.PDF
23-Sep-2022: West-Musgrave-Project---FID-Achieved.PDF
Also: OZL: Green-Light-for-West-Musgrave-Project.PDF
07-Oct-2022: GNGThunderbird-Mineral-Sands-Project-Full-Notice-to-Proceed.PDF
26-Oct-2022: Managing-Director-Transition.PDF
31-Oct-2022: Cosmos-Nickel-Concentrator-Facility-Upgrade---Scope-Change.PDF
21-Nov-2022: GNG-Preferred-Tenderer---Sorby-Hills-Lead-Silver-Project.PDF
Also: BML: BML-GRES-Selected-for-Sorby-Hills-Process-Plant.PDF
Yeah, they're keeping busy!
GNG are involved in dozens of studies for various projects. The specialise in gold mills, but as well as precious metals, they also design and build processing plants for base metals and battery metals, just like Lycopodium (LYL) do. While both LYL and GNG are based here in Australia, and are both listed on the ASX, LYL do most of their work overseas, and they specialise in West Africa, where many others fear to tread, whereas GNG do most of their work here in Australia. I imagine the two companies might merge one day. I hold shares in both, and they have very complimentary businesses, but I guess the other factor is that they both also have very high insider ownership, so perhaps they will always be separate because neither management team wants to give up control. No matter. They both keep performing admirably.
For those who are interested, you can check out Lycopodium's recent announcements here: ASX Announcements | Lycopodium and their presentations here: Presentations | Lycopodium
The studies (PFS, BFS, DFS, etc) often/usually lead to them being the front-runners for the relevant EPC (or in LYL's case, EPCM, or EPM - or EP & PM) contracts for those projects if and when those projects get the green light (positive FID) from the owners (and those owners get their finance sorted out). GNG and LYL don't usually announce the studies (Pre-feasibility, Bankable Feasibility and Definitive Feasibility Studies) when they are awarded them - because they're not usually material, but when those studies lead to the award of Engineering, Procurement and Construction (EPC) contracts or EPC + Management (EPCM) contracts, or Engineering and Procurement plus Project Management (EP + PM) contracts, they do announce them, because they are material. Both companies are quite busy this year, and have been regularly announcing additional contract awards.
In addition to that work, which can be quite lumpy, due to it's one-off nature, GNG also have recurring revenue from their Upstream PS division - which stands for Upstream Production Solutions. It's one of the only acquisitions they've ever made; they prefer organic growth. Upstream PS is the quiet achiever within GNG that keeps churning out profits from recurring revenue from multi-year contracts from some of the largest names in the Australian oil and gas industry - as well as from some of the smaller players.
Here's their main website: Upstream Production Solutions (upstreamps.com)
And here's the section within the main GNG website that discusses Upstream PS: https://www.gres.com.au/our-companies/upstream-production-solutions.aspx
So, yeah, for a company that not many people have heard of, and that even fewer people follow, they are keeping busy, and rewarding their shareholders.
Disclosure: I hold shares in GNG and LYL both here on SM and in real life.
23-Sep-2022: GNG: West-Musgrave-Project---FID-Achieved.PDF
OZL: Green-Light-for-West-Musgrave-Project.PDF
The following is Page 3 of OZ Minerals' (OZL's) announcement (full announcement link above):
I reckon this is a big one - for GNG, in terms of the sort of contracts they have been winning over recent years. The work that GNG did for IGO at their Nova Nickel project back in 2015 was worth $114m plus another $12m for the non-process infrastructure ($126m all up):
Nova Nickel Project (gres.com.au)
GR Engineering wins more work at Nova (businessnews.com.au) (2015)
And that was a smaller project I reckon, and it was nine years ago. GNG (GR Engineering) also have a history of doing a lot of builds and upgrades of nickel concentrators for Western Areas at Forrestania and then Cosmos that dates back to 2008/2009, so while gold processing plants is GNG's game, they are also pretty good at designing and building nickel plants. Western Areas (WSA) was taken over by IGO earlier this year - see here: IGO gets Forrest backing in Western Areas takeover (australianresourcesandinvestment.com.au)
GNG closed down 3c today (or -1.32%) at $2.25, which was also their day-high, so they closed on their highs, having traded as low as $2.16 earlier in the day (which was -5.26% down from Thursday's $2.28/share close).
The market may have been disappointed that there were no estimates of revenue (no $ value) in today's announcement by GNG, however they have yet to finalise the contract details. It is important that OZ Minerals (OZL) did say in their announcement today that GNG (GR Engineering Services) would be building their (OZ Minerals') nickel processing plant at West Musgrave, despite not all of the details (such as the price) being finalised yet.
Interesting that rival engineering firm Lycopodium (LYL) who also specialise in gold processing plants, but do their best work overseas, mostly in Africa these days, rose +12c (or +1.77%) to close at $6.90/share today, on the back of this announcement: LYL-Award-of-Sabodala-Massawa-Project.PDF which is interesting in that it is a EP and PM contract (Engineering & Procurement plus Project Management) but there's no Construction aspect to it, so another company is doing the actual construction of the Sabodala-Massawa Expansion Project in Senegal for Endeavour Gold Corporation (a.k.a. Endeavour Mining, who are listed on the London Stock Exchange with a secondary listing in Canada on the TSX). As I mentioned in my Gold Forum post earlier tonight, Senegal shares a border with Mali and there's plenty going on in Mali that would tend to encourage most sensible people to stay well clear of the area, so it's possible that this is a risk management or risk mitigation strategy by LYL - i.e. to do the majority of the work from here in Australia and let another company do the in-country construction in Senegal. Of course that means that this contract is worth a fair bit less than previous EPC and EPCM contracts that LYL have been previously awarded in West Africa. This contract is "valued at over A$26 million, with first gold pour from the BIOX® plant expected in early 2024."
They would normally get 5 to 10 times that for an EPC or EPCM contract for the delivery of a gold processing plant in West Africa, but when you remove the "C", the price is a lot lower, but then, in this case, I imagine the risks (for LYL) are also a lot lower. Interesting times...
And interesting that the contract that the market learned today that GNG had secured in WA (sure, West Musgrave is in the middle of the desert, just to the west of the bottom left corner of NT and the top left corner of SA, so at the convergence of the three states, but importantly still right here in Australia) is worth at least 10 times what this new LYL contract is worth, in my opinion, and yet GNG were sold down, and LYL were bid up. Doesn't matter, I hold both of them.
Here's an excerpt from the OZL announcement today:
"Our project execution strategy will enable us to mitigate industry-wide cost inflation being experienced globally. An increase in direct Project capital to approximately $1.7 billion* is offset by a substantial increase in Project value and results in stronger cash flow generation of circa $1.9 billion [nominal value from commencement of production] during the first five years of production."
* Nominal value. Assumes a third-party power purchase agreement, a mining fleet lease agreement, and a lease of the Living Hub.
Now that $1.7 billion in direct project capital committed by OZL isn't all going to go to GNG of course, GNG will only get a slice of that pie, but it should be a generous enough slice considering they are going to engineer, procure, construct and deliver the processing plant, which tends to be one of the most expensive elements of new mines. It will be in terms of hundreds of millions in my estimation, not tens of millions. But time will tell.
Suffice to say I'm glad that GNG is one of the largest positions in one of my real life portfolios, and if GNG or LYL were in the ASX300 index, they would both also be in my SMSF (which is in an industry super fund, so I am limited to ASX300 companies unforunately). GNG is in the All Ords, LYL isn't even in that index, too small, and too many shares held by management, so insufficient free float for index inclusion. GNG also have a lot of insider ownership, heaps! But they have a larger market cap than LYL. Both great companies with superb management, and both paying very decent dividend yields this year. They've been showing me the money - by putting it in my bank account.
20-July-2022: GNG-EPC-Contract---Bellevue-Gold-Project.PDF
From BGL: BGL-Bellevue-awards-EPC-Contract-to-GR-Engineering.PDF
That's today. Back on May 24th, both companies announced that GNG were undertaking preliminary works, so had won the contract, but that it had not been officially awarded and signed off.
GNG-Preliminary-Works-Agreement---Bellevue-Gold-Project.PDF
BGL-Preliminary-works-agreement-signed-with-GR-Engineering.PDF
In that announcement, Bellevue said, " GR Engineering knew the project well from its work during the study phase".
That's important to understand, GNG is the main player in doing studies (PFS, BFS and DFS studies) for Australian gold companies, and much of that work does lead to GNG being awarded the EPC (engineer, procure, construct) contracts when those projects do get a positive FID (financial investment decision, i.e. the green light to proceed by the board of the company that owns the project) and funding is secured.
In terms of GNG taking part payment for their services in shares @PortfolioPlus - they have a positive track record of doing this, as does another mining services contractor (who mostly do the actual mining) in the gold sector, MACA (MLD). Both of them have regularly bought shares in their clients, or accepted shares as part-payment for their services, and have for the most part made additional profits by later selling those shares at a higher value that what they were issued at. Not always, but usually. The shares are not generally subject to any escrow agreements, so GNG and MLD are free to sell them any time they wish to.
In GNG's case, they usually only accept a smallish proportion of their total revenue as shares. In this case it's up to $7.5m of the $87.8m fixed price contract value, so around 8.5%. While there are obviously risks associated with taking part-payment in shares, GNG are in a very good position to know exactly what those risks are, especially as they have prepared the DFS (definitive feasibility study) for the project, and they are engineering and building the processing plant themselves.
It also creates further alignment of interest between the two companies, which is positive in my view as they are essentially partnering to bring this project into production. In this particular case, I'm very comfortable with it because the Bellevue Gold Project has such strong metrics (high gold grades, low production costs), so it's a good way for GNG to make even more money out of the contract.
GNG always have a handy net cash buffer with zero net debt so they can afford to hold small positions in other companies like this.
Now in terms of the contract being a fixed price contract, that's what GNG specialise in. Pretty much ALL of their contracts are fixed price contracts, and that is because of the nature of their clients, who are mostly wanna-be gold miners who usually have zero cashflow and need that cost certainty in order to secure the finance to build these projects.
Because GNG have been doing fixed-price-contracts for so long, they have become very good at it, and they very rarely have any cost blowouts. They are well aware of the cost pressures within their industry. In fact they would understand those a lot better than we would. They naturally build fat into these contracts to cover unexpected contingencies, but not too much fat. The space is not as competitive as you might think because most companies are wary of agreeing to build entire plants on a fixed price basis, particularly in the current environment. MACA acquired a company called Interquip a couple of years ago who are a direct competitor of GNG now in that they both do bid for these types of EPC contracts. GNG have the positive track record. Interquip do not. MACA recently reported significant cost over-runs with the King Of The Hills (KOTH) processing plant for gold miner Red 5 (RED) - see here: MLD-Operational-and-Market-Update.PDF
I believe Interquip won that contract based on price. GNG bid for it, but GNG's bid was at a higher price point and they were not prepared to lower it. In other words, GNG knew that MLD's Interquip division were bidding too low and they would likely lose money, and they were not interested in matching or undercutting MLD because they did not want to lose money themselves. That's how GNG operate. They set their prices to cover their costs and give themselves a decent profit, and if they are awarded the contract that's fine, and if they're not, then it's likely because someone else has bid too low and GNG are happy to let them have it.
It just gets back to doing what you do best and relying on your experience and expertise. And GNG are very good at what they do. That's why they pay such good dividends. Because they can.
Disclosure: Of the companies mentioned in this straw, I hold shares in BGL, GNG and MLD, but not RED.
https://the-pick.com.au/bellevue-gold-stage-1-feasibility-study-rates-mine-in-the-top-tier/
Bellevue Gold Project: Production, De-risking & Growth Update Presentation
Selected Slides from that (10-June-2022) Presentation:
22-June-2022: GR Engineering Services (GNG): FY22 GUIDANCE UPDATE
The Directors of GR Engineering Services Limited (ASX: GNG) (GR Engineering) are pleased to advise that full year revenue guidance for the year ending 30 June 2022 (FY22) is forecast to be in the range of $620 million to $640 million.
GR Engineering had previously advised that FY22 revenue was expected to be $580 million to $600 million.
Commenting on the improved revenue guidance, Mr Geoff Jones, Managing Director said:
“GR Engineering is projecting a strong FY22 performance based on the year to date results and the current pipeline of ongoing work. GR Engineering remains well placed to maintain its strong dividend yield to its shareholders through FY23 and future years.”
GR Engineering is intending to release its results for the twelve months ending 30 June 2022 on or around 23 August 2022.
Ends
Disclosure: I hold GNG shares. Based on yesterday's closing price of $1.76/share, their trailing (historical) dividend yield is 9%, PLUS the value of their franking credits, and their last 3 dividends have all been fully franked. However, their dividend yield is even better than that, because that 9% is based on their last two dividends, which were a 7 cps final div paid on 22-Sep-2021 and a 9 cps interim div paid on 25-March-2022. That interim dividend was +80% higher than their previous interim dividend (which was 5 cps), and their final dividend this year will be higher than the 7 cps final div they paid last year, because they've had a better year than they did last year, and they've just upgraded their guidance again.
GNG specialise in the design and construction of Gold Processing Plants, and they do most of their work here in Australia, with some work also done overseas. GNG tend to win the majority of the available EPC contracts for the design and construction of Australian gold processing plants, after preparing or assisting in the preparation of feasibility reports for companies who are developing gold projects and looking to build processing plants. That area of the market has been solid for GNG lately. However, that's not ALL they do. They work in other industries and they also own a division called "Upstream PS" or "Upstream Processing Solutions" which provides maintenance and operations services for the energy (oil & gas) industry. Upstream PS provides a fair chunk of GNG's recurring revenue via multi-year operations/maintenance contracts, whereas their other larger division tends to have more lumpy revenue due to the one-off nature of the contracts. GNG are always busy, but they get busier than usual at times, and this past year has been one of those times when they have had more work than usual - and shareholders reap the rewards of that via increased dividends.
One of the things I like best about GNG is that a large percentage of the company is owned by their board and KMP (key management personnel) so they think and make decisions like they own the business because to a large extent they do own the business. And that's another reason why the profits tend to flow through to the shareholders.
In my 17-May-2020 "Substantial Shareholders" straw for GNG, I listed all of the insider ownership which added up to 60.7% of the company, plus the 33.3% that was held by institutional shareholders - which at the time included CBA/Colonial First State, Carol Australia Holdings/Mitsubishi UFJ Financial Group (MUFJFG, which bought Colonial First State Global Asset Management off CBA in August 2019 and then rebranded it as First Sentier Investors) and Spheria Asset Management.
Today, 2 years and one month later, those three Insto's speak for 28.58% of GNG, plus we have a new shareholder who holds 9.88% of GNG and is listed as both "Superannuation and Investments HoldCo Pty Ltd" and "Comet Asia Holdings II Pte Ltd". All of the company founders/insiders who were listed as substantial holders in 2020 are still on the register except for Barry Patterson who retired from the GNG board in December 2020:
- David Joseph & Jane Frances Sala Tenna holds 7.66% (12,325,000 shares), previously 8.02% (12,325,500 shares),
- Joley Pty Ltd (George Botica) holds 6.54%, formerly 6.85%, still 10,524,000 GNG shares,
- Paksian Pty Ltd (Joe Ricciardo, company co-founder and father of Formula 1 race car driver Daniel Ricciardo) holds 6.09%, formerly 6.38%, still 9,798,578 GNG shares.
- Kingarth Pty Ltd (Tony Patrizi) holds 6.09% (9,795,000 shares), formerly 5.87% (9,025,000 shares),
- Joe Totaro, one of the co-founders, and previously the CFO and Company Secretary, remains on the board as a non-executive director, and still holds 8m GNG shares, which is 4.97% of GNG but was 5.21% of the company 2 years ago (due to dilution over the past two years due to executive remuneration),
- Peter Hood still owns half a million shares.
- Geoff Jones, GNG's Managing Director, owns 200,000 shares plus 864,447 share appreciation rights, formerly 772,134 shares, plus 1.1 million appreciation rights.
- Quintal Pty Ltd (Ron/Toni Harken) holds 5.28% (8.5m shares), formerly 6.18% (9.5m shares), and
- Beverley Jone Schier (Rodney and Beverley Shier) owns 5.03%, formerly 5.27%, although that reduction is once again just due to a small amount of dilution over the 2 years due to GNG issuing of a small number of new shares as part of their usual executive remuneration; Bev's shareholding remains at 8.1 million GNG shares.
So Geoff Jones has been selling down (apparently to satisfy "tax obligations") however he was never a substantial shareholder, and is not one of the original founders of the business. Geoff joined the company in 2013. Everyone else has either maintained their position, or trimmed their position slightly, or added to their position in the case of Tony Patrizi who was a co-founder and remains on as an executive director.
In May 2020 I calculated that the company founders and insiders plus those three institutional investors (insto's) held around 94% of the company, leaving a free float of only about 6%.
Back then, in my "Substantial Shareholders" straw, I also listed a number of other insider shareholders from their annual report that held less than 5% but still held GNG shares.
There has been some movement but it looks to me like at least 90% of the company is still held by insto's and insiders. So liquidity can be a problem. There are sometimes not much in the way of buyers or sellers for GNG, particularly the sellers, and there can be some pretty substantial gaps between the price points. Which adds to the volatility of the share price. It can be very choppy or not move much at all for days or weeks.
So I hold GNG and I like the company a lot. Today's revenue guidance upgrade is not unexpected but it's always nice to know that my investment thesis is playing out OK. Great company. Great income stock.
01-Nov-2021: Just as they did last year, GR Engineering (GNG) have provided conservative guidance and then upgraded it:
FY22 GUIDANCE UPDATE:
The Directors of GR Engineering Services Limited (ASX: GNG) (GR Engineering) are pleased to advise that full year revenue guidance for the year ending 30 June 2022 (FY22) is forecast to be in the range of $540 million to $560 million.
GR Engineering had previously advised that FY22 revenue was expected to be $440 million to $460 million.
GR Engineering is well positioned for significant growth in FY22 based on recently announced contract wins, increased confidence in the conversion of near term opportunities to engineering, procurement and construction (EPC) contracts and the execution of the existing order book. Importantly, GR Engineering continues to build its contracted pipeline of work into FY23. Commenting on the improved revenue guidance,
Mr Geoff Jones, Managing Director said: “GR Engineering is forecasting significant growth on the record results achieved in FY21. The pipeline of ongoing and near term work is growing and provides increased revenue and earnings visibility for both FY22 and FY23, enhancing GR Engineering’s ability to deliver returns to its shareholders”.
See here.
That's how it's done.
Underpromise and overdeliver. We're only one third of the way through FY22 (4 months in) so I fully expect another upgrade during the next 6 months.
Disclosure: I hold GNG shares. Excellent management. Heaps of skin in the game. Superb dividends. Lumpy revenue, but they're flying again this year (and last year).
24-Aug-2021: GR Engineering Services (GRES, ASX: GNG), a company I have personally held for years, have reported this morning. After a couple of rough years, they have had a really good one in FY21. Their final dividend is going to be 7c fully franked, so 12c fully franked for the year (including the 5c interim div), which - ignoring the franking credits entirely - puts them on a dividend yield of 8.2%, with franking credits as a bonus for those of us who can and do use them. That's based on their closing share price yesterday of $1.455. Understandably, they're up today on this result, around +10% as I type this (@ $1.60).
Key Earnings and Balance Sheet Data – Consolidated Group:
Revenue & Earnings:
- Revenue from operations: $392.4m (vs $222.4m in FY20)
- EBITDA: $37.2m (underlying) (vs $11.31m in FY20)
- PBT: $33.7m (vs ($9.7m) loss in FY20)
- Tax: $10.5m tax paid (vs ($2.5m) tax credit in FY20)
- NPAT: $23.2m (vs ($7.2m) loss in FY20)
- Basic EPS: 14.9 cps (vs (4.7 cps) loss (negative 4.7 cps) in FY20)
Balance Sheet & Cashflow:
- Cash: $69.0m ( vs $37.5m in FY20)
- Total equity: $51.6m (vs $34.7m in FY20)
- Net operating cashflow: $49.5m (vs $11.2m in FY20)
That's quite the turnaround. For further details see their FY21 Financial Results - Media Release, their Preliminary Final Report and their Full Year Statutory Accounts FY21.
Very high insider ownership (skin in the game), and very well run, although revenue and earnings can be very lumpy due to the shorter-term contract nature of a lot of their EPC (Engineer, Procure, Construct) work.
They do have recurring revenue however from their oil and gas services business, Upstream Production Solutions Pty Ltd (Upstream PS), which during FY21 achieved sustained revenue contributions primarily through a combination of operations, maintenance and brownfields projects servicing the coal seam gas (CSG), liquefied natural gas (LNG), carbon sequestration and onshore and offshore oil and gas sectors throughout Australia.
FY22 Update and Outlook
GR Engineering has a strong order book dominated by Australian projects and has been building its pipeline for both FY22 and FY23. The consolidated entity expects revenue for FY22 to be in the range of $440 million to $460 million.
GR Engineering’s design and construction order book for works currently being undertaken and which will continue into FY22 include:
- Thunderbox 6 Mtpa Expansion Project - $101.0 million EPC Contract with Northern Star Resources Limited in relation to the design, engineering, procurement, construction and commissioning of the Thunderbox 6 Mtpa Expansion Project. Work commenced in July 2021.
- Warrawoona Gold Project - $75.0 million EPC Contract with Calidus Resources Limited in relation to the design and construction of the processing plant and associated infrastructure for the Warrawoona Gold Project. Work commenced in late CY20.
- Newmont Tanami Gold Mine - $68.0 million subcontractor with RUC Cementation Mining Contractors Pty Ltd (RUC) in relation to Newmont Corporation's (Newmont) Tanami Gold Mine in Australia. RUC has been engaged by Newmont under a head contract to complete certain underground construction works for Newmont. GR Engineering is responsible for the construction and commissioning of the temporary and permanent works associated with the surface infrastructure. Work is expected to be completed by April 2023.
- Norseman Gold Project - $59.5 million EPC Contract with Pantoro Limited for the engineering, procurement and construction of a new processing plant for its 50% owned Norseman Gold Project in Western Australia. GR Engineering commenced work during the first quarter of CY21.
- Wiluna Gold Operation Project - $25.7 million EPC Contract with Wiluna Mining Corporation for stage 1 works relating to the concentrator development program for its Wiluna Gold Operations located in Western Australia. GR Engineering commenced work in December 2020 and commissioning is scheduled for the last quarter for CY21.
GR Engineering’s pipeline of work opportunities include:
- Abra Base Metals Project - $74.0 million project award by Abra Mining Pty Ltd (Abra Mining), for the design and construction of a 1.2 Mtpa lead sulphide flotation plant and ancillary infrastructure for the Abra Base Metals Project located in Western Australia. Abra Mining is 50% owned by Galena Mining Limited and 50% owned by Toho Zinc. GR Engineering has also been awarded additional work by Abra Mining to relocate, refurbish and commission the Higginsville Paste Plant.
- Thunderbird Mineral Sands Project - in May 2021, GR Engineering restarted early engineering and design works for the Thunderbird Mineral Sands Project for Sheffield Resources Limited and is progressing critical path design and procurement activities for the project. Owners site works activities have commenced this year, with EPC site works due to commence in April 2022. The final investment decision is expected in late 2021.
- Woodlark Gold Project - letter of intent with Geopacific Resources Limited for the proposed construction of a 2.4 Mtpa gold process plant on Woodlark Island in Papua New Guinea. Early works are being progressed as contract negotiations are being finalised.
- WA Battery Graphite Manufacturing Facility - letter of intent with EcoGraf (Australia) Limited for an engineering, procurement and construction contract for the development of a 20,000 tpa battery graphite facility in Western Australia. GR Engineering is undertaking early engineering works whilst working with EcoGraf to develop and execute the EPC contract.
- Bardoc Gold Project - appointed as preferred tenderer by Bardoc Gold Limited in relation to the EPC contract for the processing facility and associated infrastructure at its 100% owned Bardoc Gold Project.
Major projects completed during FY21 and subsequent to year end include:
- Thunderbox Paste Plant Project;
- Carosue Dam Operations Plant Expansion Project;
- Deflector Flotation Tails Leach Project;
- Lake Way Potash Project;
- Nullagine Mill Refurbishment Project;
- Davyhurst Restart Project;
- Sandy Ridge Waste Storage Project.
At 30 June 2021, GR Engineering was engaged on 30 studies across a broad range of commodities for projects both in Australia and abroad. This included the Hanlon Engineering team, based in Arizona, who also continued to win study work across multiple jurisdictions in the Americas.
These studies - which include PFS (pre-feasibility studies) and DFS (definitive feasibility studies, a.k.a. BFS or bankable feasibility studies) - are an important component of the work that GNG do, as a significant percentage of their EPC work comes directly from those studies. The studies often lead to GNG being awarded the EPC contract for the plant build.
Lycopodium (LYL), once the engineering arm of Monadelphous Group (MND, who also reported today, I hold MND & LYL as well as GNG) before they spun it out into a separate listed company, do the same thing that GNG do, except LYL's focus is mostly on Australian companies who operate outside of Australia, such as in Africa, South America, etc, whereas GNG concentrate primarilly on Australia. GNG do sometimes complete work overseas however the vast majority of their projects are all located here in Australia. LYL do sometimes complete work here in Australia (they are an Australian-based company), but traditionally their work has tended to be located overseas. I hold both, and both can have very lumpy revenue so their profits can move wildly from year to year, but both are excellent at risk management and avoiding debt, and both have very high insider ownership, so management have plenty of skin in the game. Both can also provide very good dividends, particularly in their good years.
However, both are smaller companies, and there can be limited liquidity, so neither are really suitable for most fund managers. They are far better suited to smaller retail investors with a need for income and a high tolerance for lumpy results.
31-May-2021: FY21 Guidance Update
The Directors of GR Engineering Services Limited (ASX: GNG) (GR Engineering) are pleased to advise that full year revenue guidance for the year ending 30 June 2021 (FY21) is forecast to be in the range of $370 million to $390 million.
GR Engineering had previously advised that FY21 revenue was expected to be $340 million to $360 million.
Both revenue and margins are expected to improve in the second half of FY21. The tightening of the Australian labour market has not impacted GR Engineering’s margins during FY21. GR Engineering continues to increase its workforce to meet demand and execute on its strong pipeline of work.
GR Engineering continues to successfully navigate through the impact of COVID-19, with no material impact on the FY21 results. GR Engineering continues to manage equipment deliveries in line with project schedules despite delays with international shipping.
Commenting on the improved revenue guidance, Mr Geoff Jones, Managing Director said:
“GR Engineering is projecting record FY21 revenue and EBITDA based on the year to date results and our current ongoing work. Given our project pipeline and near term prospective work and continued strong cash generation, GR Engineering remains well placed to deliver returns to its shareholders through FY22 and FY23.”
GR Engineering is intending to release its results for the twelve months ending 30 June 2021 on or around 24 August 2021.
--- ends ---
I hold GNG shares. This is their 2nd upgrade. Their last one was on 02-Feb-2021 (4 months ago), when they upgraded their previous FY21 revenue guidance from $280 to $300 million - to $340 to $360 million - and that's now been upgraded to revenue guidance for FY21 of $370 to $390m. Of course, more revenue does not always translate into higher earnings (profits), but in GNG's case, it usually does.
The image below shows the type of work that GNG tend to do - being the EPC (engineering, procurement and construction) of metals and minerals processing plants, mostly here in Australia, but also occasionally overseas. The specialise in gold processing plants. You can watch a video about what they do here.
