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#Results H1 FY2021
Last edited 2 months ago

23-Feb-2021:  FY2021 Half Year Results ASX Announcement   plus   FY2021 Half Year Results Investor Presentation   and   Interim Financial Report 31 December 2020   plus   Appendix 4D

Macmahon continues earnings and margin growth in first half FY21

  • Increased earnings and cashflow
    • Revenue of $652.5m, down 5% pcp
    • Underlying EBITDA* of $121.2m, up 6% pcp, EBITDA margin 18.6%
    • Underlying EBIT(A)** of $46.5m, up 5% pcp, EBIT(A) margin 7.1%
    • Statutory Net Profit After Tax of $44.8m, up 56% pcp
    • Operating cash flow*** of $96.7m, up 7% pcp
  • Strong balance sheet for growth
    • Gearing**** at 20.0% and Net Debt/EBITDA of 0.5x
    • Available liquidity of $255m (cash on hand of $148.4m)
  • Interim dividend increased to 0.30cps (20% franked), up 20% pcp
  • Order book of $4.2bn*****, including preferred contract worth $220m
  • Tender pipeline of $7bn
  • FY21 guidance******:
    • Revenue $1.3bn – $1.4bn (reduced from $1.4bn - $1.5bn, due to accounting treatment of certain revenue at Batu Hijau)
    • EBIT(A) $90m – $100m (unchanged, as Batu Hijau accounting treatment does not impact EBIT)

Macmahon Holdings Limited (ASX:MAH) has delivered earnings growth for the six months ended 31 December 2020. Statutory Net Profit After Tax increased to $44.8 million together with growth in underlying EBIT(A), margins and operating cash flow.

Revenue fell by 5% over the prior corresponding period (‘pcp’) to $652.5 million, due to a change in accounting treatment on certain client provided consumable items at Batu Hijau. Operational changes relating to COVID-19 have restricted control of these items, meaning revenue and costs have not been recorded, consistent with the application of accounting standard AASB 15*******. As there is no margin associated with these consumable items, earnings have not been impacted. Excluding this change, revenue grew approximately 3% across the remainder of the business.

Underlying EBITDA* increased by 6% to $121.2 million (EBITDA margin 18.6%) and underlying EBIT(A)** was up 5% to $46.5 million (EBIT margin 7.1%), reflecting an increase in activity across the Company’s operations.

This earnings growth has been delivered in a COVID-19 environment where disruptions to business and travel, and the risks posed to health and wellbeing were actively managed. Notwithstanding some additional costs and a tight labour market, the Company has been able to maintain earnings and margin growth.

Macmahon has recognised a $17.9 million Deferred Tax Asset in the results due to a change in the Australian income tax legislation announced in the October 2020 Federal budget, which provided an incentive to fully deduct the investment in new Australian capex. This has contributed to the 56% increase in in Statutory Net Profit After Tax of $44.8 million.

Cash Flow, Balance Sheet and Dividends

Macmahon generated operating cash flow (excluding interest, tax and M&A costs) of $96.7 million, representing a conversion rate from underlying EBITDA of 79.8%. Macmahon expects further improvement in cash conversion in the second half of FY21 in line with its full year target of 85%.

Capex for the half was $138.9 million, of which $46.1 million was sustaining capex. For the full year, total capex is forecast to be $230 million (up from $175 million previously), which comprises sustaining capex of $95 million (unchanged), $40m for extensions (Mount Monger, Deflector, Nicolsons, Batu Hijau) and growth capex (Foxleigh, Byerwen, Boston Shaker, Solomon, Bellevue) of $95 million. The Company remains focused on disciplined capital management and targets all capex to achieve at least 15% return on capital employed over the contract life.

Macmahon has continued to maintain a strong balance sheet, with gearing of 20.0%, cash on hand of $148.4 million, and net debt of $129.0 million at 31 December 2020 (all-inclusive of AASB 16 Leases).

Macmahon increased and extended its debt facilities during the period to $170 million from $75 million at a competitive interest rate of sub 3% plus swap. As a result, the Company is well placed to fund growth opportunities with cash and unutilised facilities of $255 million.

The Board has declared an increase in interim dividend to 0.30 cents per share for the half year ended 31 December 2020 (1H20: 0.25 cents per share). This represents a 20.7% payout ratio, which is in line with the Company’s current dividend policy payout range of 10 - 25%. The interim dividend will be partially franked (20%), with a record date of 17 March 2021, and will be paid to shareholders on 7 April 2021.


FY21 Guidance, Order Book and Outlook

Macmahon maintains its EBIT(A) guidance of $90 – $100 million******, which incorporates an increase in AUD:USD assumption from 0.72 to 0.75.

As a result of the change in revenue treatment at Batu Hijau, the Company’s FY21 revenue is now expected to be in the range of $1.3 billion – $1.4 billion, restated from $1.4 – $1.5 billion previously.

Macmahon’s order book as at 31 December 2020 excluding the Batu Hijau revenue adjustment was approximately $4.17 billion, which includes $322m of new work (Foxleigh and other contract wins). Following the award of a new contract extension at Deflector and finalisation of the Warrawoona contract (for which the Company is currently the preferred tenderer), the order book will stand at approximately $4.21 billion.

Macmahon is also in the process of finalising the commercial model for another significant cut back at Batu Hijau with AMNT (‘Phase 8’), which will extend the current mining activities by another 6 years from 2022 to 2028. As part of this process, Macmahon is in discussions to remove certain ‘pass-through’ costs on which no margin is earned.  If finalised, this change will improve working capital, tax efficiency and reduce forex exposure.

Macmahon remains positive about the longer-term growth prospects with a current tender pipeline of approximately $7 billion, of which $3 billion relates to new clients and $1.2 billion in underground work, with the majority based in Australia. Excluding potential extensions, the Company has current submitted tenders of circa $2.2 billion and tenders under preparation of $1.6 billion.

Commentary

Commenting on the first half and the outlook for the Company, Macmahon’s Chief Executive Officer and Managing Director Michael Finnegan said:

“Macmahon has produced a solid first half result and I am pleased the business has continued to deliver growth in earnings and margins, despite COVID-19 disruptions and currency headwinds.

The first half was a consolidation period, but an important one for the business with continued growth of the underground division, and the award and appointment as preferred contractor for various projects including Foxleigh, Warrawoona, Coburn, Bellevue and Nicolsons. Since half year end, we have also secured the Deflector extension. This additional work of approximately $760 million aligns with key elements of our strategy and provides us with a solid platform for continued earnings growth.

The resource sector outlook is robust driven by high commodity prices and supportive capital markets. As a result, we have seen many clients advance their projects into the tender stage. This pending wave of potential awards over the next 12 months is reflected in our significant tender pipeline and our focus will be on converting more opportunities to drive growth into FY22 and beyond.

In addition, we will leverage off our competitive advantage of being able to service both surface and underground mining concurrently, expand our service offering across the mining value chain and optimising the safe delivery of our order book. This will be supported by our continued investment in people, mining technology and ongoing digital transformation.”

--- ENDS ---

Notes:

  1. (*) Underlying EBITDA is earnings before interest, tax, depreciation and amortisation, share based payments and M&A transaction costs. A reconciliation of Non-IFRS financial information is contained on slide 29 of the Company’s half year results presentation.
  2. (**) Underlying EBIT is earnings before interest and tax, share based payments and M&A transaction costs and GBF amortisation of customer contracts.
  3. (***) Net operating cash flow excluding interest and tax and M&A costs
  4. (****) Gearing = Net Debt / (Net Debt + Equity)
  5. (*****) Pro forma as at 23 February 2021, adjusted for Batu Hijau revenue treatment, includes Deflector, and Warrawoona (preferred tenderer)
  6. (******) Guidance assumes an exchange rate of AUD:USD 0.75 and excludes one-off items and amortisation related to the GBF acquisition.
  7. (*******) AASB 15, if a customer contributes goods, to facilitate fulfilment of the contract, an assessment is required as to whether the Company obtains control of these contributed goods.

--- click on the links at the top for more - I hold MAH shares, and they are also on my Strawman.com scorecard. ---

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#New Contract 12/2/21
Added 2 months ago

Macmahon secures 4 year $220m contract at Deflector underground mine

Macmahon Holdings Limited (ASX:MAH) (‘Macmahon’ or ‘the Company’) is pleased to announce that its underground mining division has been awarded a 4 year contract with Silver Lake Resources (ASX:SLR) (‘Silver Lake’) to perform the mining works at the Deflector gold and copper mine in Western Australia.

A Macmahon subsidiary, GBF, has been providing underground mining services at the Deflector mine since mining commenced in early 2016. Macmahon acquired 100% of GBF in 2019, and this business is now an important part of the Company’s strategy to expand in the underground mining services market.

The new contract with Silver Lake will run until April 2025, and is expected to generate approximately $220 million in revenue for the Company over this period. The contract is a full service mining contract and therefore incorporates all underground development, ground support and production activities, including the provision of all labour and mobile mining equipment.

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#Reports and Presentations
Added 5 months ago
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#Reports and Presentations
Last edited 6 months ago

21-Oct-2020:  2020 Annual General Meeting Presentation   plus   2020 AGM - Address to Shareholders

Also:  Preferred contractor for $250 million Foxleigh project

[I hold MAH shares.]

A Record Year – Financial Highlights (from page 13 of the presso - 1st link above):

  • FY20 Revenue: $1,380.4m, up 25% on FY19
  • FY20 Record underlying EBITDA*: $238.7m, up 32% on FY19
  • FY20 Record underlying EBIT(A)*: $91.6m, up 22% on FY19
  • FY20 Record reported NPAT: $64.9m, up 41% on FY19
  • FY20 Record operating cash flow**: $218.4m, up 73% on FY19
  • Net Tangible Assets: 22.1 cps, up 9% on FY19
  • Return on Equity***: 14.6%
  • Return on Average Capital Employed****: 14.8%
  • FY20 Dividend: 0.60 cps, up 20% on FY19
  • Order Book: $4.5bn
  • Tender Pipeline: $7.5bn+
  • Gearing [ND/E]: 10.9%

Notes:

  1. (*) Underlying numbers include total adjustments of $4.2m – refer to slide 30 of FY20 results presentation
  2. 2(**) OCF: Net operating cash flow excluding interest and tax and M&A costs
  3. (***) Underlying NPAT (A) / Average Equity
  4. (****) Underlying EBIT (A) / Average (Total Assets – Current Liabilities)

In addition to those exceptionally positive highlights, achieved in a year when many companies are/were blaming the COVID-19 pandemic for their own sub-par results, I hold MAH because the majority of their clients are gold mining companies, who currently have the strong tailwind of a high gold price.  I am bullish on gold and believe we are in a multi-year gold bull market, with significant further upside.  Companies like MAH provide good "pick and shovel play" exposure to that thematic, and MAH are a very good company in their own right - and are exceptionally well run.  They do have Indonesian and PNG exposure, but they have the board and management to navigate through and manage those risks in my opinion.  Most of their clients are Australian companies operating in Australia.

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#New Work Pipeline
Added 9 months ago

03-Aug-2020:  STA: Award of Coburn Civil Bulk Earthworks Construction Pack

Strandline prepares for construction at Coburn with appointment of bulk earthworks contractor

Appointment of Macmahon (MAH) to establish road access and bulk earthworks marks completion of another key condition required to finalise project funding

HIGHLIGHTS

  • Strandline awards ~$23m contract to leading civil and mining contractor Macmahon to construct road access and bulk earthworks at its Coburn mineral sands project in WA
  • The scope includes construction of a 43km access road connecting the mine with the North West Coastal Highway, installation of other site roads, bulk earthworks pads, dams and drainage
  • The award of this contract is completed as one of Strandline’s debt finance conditions precedent and follows the completion of sufficient detailed design and a competitive tender process
  • Awarding this contract follows the recent investment decision by the Northern Australia Infrastructure Facility (NAIF) to provide a A$150m loan facility for the development of Coburn
  • Strandline is moving to finalise the balance of project funding and prepare for mobilising construction activities

--- click on the link above for the full Strandline (STA) announcement ---

[I hold MAH shares, but not STA shares]

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#Reports and Presentations
Added 10 months ago

16-June-2020:  ASX CEO Connect June 2020 Presentation 

That link will take you to the Presentation slide pack that will be used by Macmahon (MAH) CEO & MD, Michael (Mick) Finnegan today at the ASX CEO Connect event.  For more information on ASX CEO Connect, click here.

Disclosure:  I hold MAH shares.

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#New Work Pipeline
Added 12 months ago

30-Apr-2020:  STA: Macmahon appointed as Preferred Mining Contractor for the Strandline Resources Coburn mineral sands project in WA  

Strandline (STA) advancing major execution contracts as part of project financing and in readiness for construction.

HIGHLIGHTS:

  • Early contractor involvement (ECI) agreement executed with Macmahon Holdings relating to mining services contract for Coburn project
  • Under the mining services contract, Macmahon will provide and operate the large mining fleet associated with ore mining, overburden removal, pit backfill and land recontouring 
  • Macmahon is a well-established leading mining contractor, with significant experience in the Australian resources sector, including in mineral sands
  • ECI agreement contains a detailed term sheet for an alliancing-style commercial framework with gain-and-pain share metrics linked to cost and performance targets
  • Terms of the ECI agreement are based on the mine plan, methodology and productivity pricing assumptions contained in the Coburn DFS
  • This agreement follows the completion of major binding offtake contracts with some of the world’s leading consumers across Europe, America and China (see ASX releases by STA on 20 April 2020)  
  • With the DFS completed and key development approvals already in place, Coburn is development-ready pending finalisation of project financing 

--- click on link above for more ---

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#FOR on MAH, March 2020
Last edited one year ago

27-Mar-2020: Livewire: "Buy Hold Sell: 5 cash earners for a crisis" with Steve Johnson (Forager Funds) and Ben McGarry (from Totus Capital)

Steve tips MAH at around the 3:30 mark as his pick for a company that is going to produce some sustainable cashflow through this cycle.  MAH is in Forager's Australian Shares Fund (ASX: FOR) and Steve explains why.  I also hold MAH and I'm bullish that they'll get through this better than many other mining services industry participants due to their clients and the nature of their contracts (multi-year and often life-of-mine contracts, i.e. long term).  Ben's tip is Objective Corp (OCL).

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#Bull Case
Added one year ago

20-Mar-20:  I've written plenty on MAH, so I'll keep this brief.  They've been sold down from 30c to 18c, on poor sentiment and fund redemptions.  However, the vast majority of their clients are gold miners, they have long-term (multi-year) contracts that are based on tonnes of ore processed (not linked to commodity prices), and excellent management.  Like with NWH (NRW Holdings), this is a great opportunity to buy a quality company at a significant discount to their intrinsic value.

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#Bull Case
Last edited one year ago

Some time in 2018 (before I started dating my straws): 

Macmahon (MAH) have new management (Mick Finnegan), a new major (Indonesian) shareholder, have fought off a takeover attempt by CIMIC (CIM), are Forager's (FOR's) largest holding in their Australian Equities fund, and have taken steps to fix all of their prior year issues, including the losses incurred at Newcrest's Telfer gold mine - which was probably one of their biggest issues.  There is heaps of upside if they can outperform on their biggest contract - which is the Batu Hijau contract (for their largest shareholder, PT AMNT).  They have a gain share/pain share agreement where the pain is limited to basic project costs, but the gain side is pretty much unlimited.  Basically, the downside is they could make nothing at all on Batu Hijau, if they underperform, and that would still be significant because that contract is massive - currently around half of their entire order book, but - importantly - they won't LOSE money on the contract (like they have been at Telfer - working for NCM).  The upside (the gain share) is significant however, and is not really priced in to the MAH SP at this point, in my opinion.  Mick Finnegan has plenty of experience working in Indonesia and PNG, and plenty of friends and industry contacts there, so they are not venturing out into the great unknown here.  

Steve Johnson at Forager wrote about MAH in their March Quarterly report (in April this year), and I'm going to try to post that in here in two posts (split due to the 2,500 character limit on posts).  For now, here's a small bit of it:

New contract wins, paired with extensions of existing contracts, have left the company in a fortunate position compared to some other mining services businesses: it doesn’t have to constantly win new work. For the next four-odd years, Macmahon has a lot of committed revenue.

Macmahon Revenue by Contract:

Contract, Remaining Contract Term (years), Annual  Revenue ($m)

Batu Hijau, 5, $530m
Tropicana, 6, $225m
Byerwen, 3, $117m
Telfer, 4, $80m
Mt Morgan, 5, $50m
Other, $100m
Total $1,102m ($1.1 billion)

Source: Macmahon and Forager Fund

 

 

Disclosure:  I own MAH shares.

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#Comment on MAH from FOR [Pt2]
Last edited one year ago

June 2018:  This is the 2nd straw of 2 - Comments from FOR about MAH in FOR's March 2018 Quarterly Report:

Recent wins in WA and Indonesia have grown the small underground mining business. Acquiring TMM Group in February has also pushed the business into civil work for mine sites, which fits in well with Macmahon’s other services.

New contract wins, paired with extensions of existing contracts, have left the company in a fortunate position compared to some other mining services businesses: it doesn’t have to constantly win new work. For the next four-odd years, Macmahon has a lot of committed revenue.

Macmahon Revenue by Contract:

Contract, Remaining Contract Term (years), Annual Revenue ($m)

Batu Hijau, 5, $530m
Tropicana, 6, $225m
Byerwen, 3, $117m
Telfer, 4, $80m
Mt Morgan, 5, $50m
Other, $100m
Total $1,102m ($1.1 billion)

[Source: Macmahon and Forager Fund]

The business has now come full circle on growth and capital expenditure. The half just gone saw $232m spent on equipment (including $183m of gear purchased from AMNT using shares), compared to only $27m last year.  More capital expenditure will be needed for current and future contracts.

Despite having people and expertise, Macmahon remains a business where capital expenditure on mining equipment is critically important. Spending on gear to grow is easy when times are good. But picking difficult contracts, or executing contracts poorly, can destroy profit margins and even cause losses. Telfer is a good reminder of what can go wrong. Macmahon needs to be careful.

By next year Batu Hijau and the two new contracts will be contributing earnings for the full year. If it executes well, without any new contract wins, the business should be generating close to $1.1bn in revenue and more than $85m of earnings before interest and tax. At the current price the business is trading around seven times after-tax earnings. Macmahon remains the largest position in the Australian Fund.

[Source: Forager Fund, March 2018 Quarterly Report]

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#Broker/Analyst Reports
Last edited one year ago

02-Mar-2019:  Moelis Australia have released an updated Broker/Analyst Report on Macmahon (post MAH's 1HFY19 results) which is available free via the "ASX Equity Research Scheme", and that report can be viewed here.

For more details on the scheme or to sign up for a free email every Friday afternoon with links in it to that week's free reports - see here.

Moelis rate MAH as a "Buy" with a target price of 30 cents, which is 27.7% above yesterday's 23.5 cent closing price.

Disclosure:  I hold MAH shares.

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#Results
Last edited one year ago

30-Aug-2019:  Busy day for MAH.  They have emerged from their trading suspension with the news that the recent negotiations with Newcrest (NCM) have been more positive and the most likely outcome now is that the remaining work at Telfer will be profitable for Macmahon as Newcrest are likely to increase the rates that they pay Macmahon for the work they do there.  MAH have therefore NOT made any provision for Telfer (onerous contract provision/write-down) in their FY19 accounts, which improves their numbers.

Speaking of numbers, they are good, and they've managed to reinstate their dividend payments as well, beginning with a half cent (30% franked) full-year dividend.  As an MAH shareholder, and a shareholder in Forager's ASF (ASX:FOR, which has MAH as one of their top 5 positions), I'm very happy with this report.  No nasty surprises, and plenty of positives.

Macmahon FY19 Results Release

Macmahon FY19 Investor Presentation

Macmahon 2019 Annual Report

Appendix 4E

Telfer Update

2019 Full Year Results Date and Conference Call Details

 

Macmahon delivers strong earnings uplift in FY19 and reinstates sustainable dividends:

  • Revenue of $1,103.0 million, up 55% (FY18: $710.3m) and above guidance
  • Underlying EBITDA  of $181.4 million, up 52% (FY18: $119.2m)
  • Underlying EBIT of $75.1 million, up 81% (FY18: $41.5m) and within guidance
  • Underlying EPS of 2.69cps, up 74% (FY18: 1.55cps)
  • Operating cash flow of $125.9 million, up 24% (FY18 $101.9m)
  • Robust balance sheet with low gearing at 10.5%
  • NTA of 20.3cps, up 8% (FY18 NTA 18.7cps)
  • Advanced negotiations to increase contract rates at Telfer – no onerous contract provision recorded
  • Reinstatement of dividends - FY19 final dividend of 0.5cps (partially franked)
  • Strong order book of ~$4.7 billion, providing considerable revenue visibility
  • FY20 revenue and earnings guidance of $1.2 billion - $1.3 billion revenue and $80 million - $90 million EBIT

“Consistent project execution has been a key focus for Macmahon and is driving a real transformation in Macmahon’s financial performance, with FY19 revenue more than triple what we achieved in FY17 and earnings moving from negative to strongly positive in that period. 

 
“This reliable performance and the good revenue visibility provided by our $4.7 billion order book has underpinned the Board’s decision to reinstate dividends to Macmahon shareholders.  The FY19 final dividend of 0.5 cents per share is the Company’s first dividend in seven years with the Board aiming to pay dividends on a sustainable basis going forward.” 

 
Cash Flow and Balance Sheet 
 
Macmahon generated operating cash flow (excluding interest, tax and settlement for the class action) of $125.9 million in FY19 (FY18: $101.9 million), representing a conversion rate from underlying EBITDA of 69.4%. The cash flow conversion was impacted by an increase in working capital due to delayed receipts from trade receivables of $24m slightly later than expected. Including payments from customers received in the first week of July 2019, the EBITDA conversion would increase to 82.6%. 
 
Macmahon maintained a robust balance sheet in the year, with gearing of 10.5% at 30 June 2019, cash on hand of $113.2 million, and net debt of $52.7 million. When factoring in the delayed receipts from clients, net debt and gearing is reduced to $28.7 million and 6.0% respectively.  
 
Outlook

 
The Company is well positioned for growth in FY20 with secured work in hand of $1.2 billion. The Company expects FY20 revenue of $1.2-1.3 billion, and EBIT of $80-90 million.  
 
Mr Finnegan said: “Over the past 12 months we have continued to position the business for growth, both organically and through the strategic acquisition of specialist underground contractor GBF Group. 
 
“These initiatives have been in line with our growth strategy to enable Macmahon to be a leading mining contractor that can service clients through the life cycle of their mining operations.  
 
“The acquisition of GBF, our $4.7 billion order book, and significant tender pipeline means the Company is well positioned to deliver further earnings and cash flow growth in FY20. 
 
“This growth is underpinned by consistent execution on our secured work in hand, and a tender pipeline of more than $7 billion in potential new revenue. This pipeline includes over $4.5 billion of projects where Macmahon is the preferred or exclusive tenderer. Many of these opportunities are with existing clients which, given our ongoing strong performance, puts us in a competitive position. 
 
“In FY20, our focus will be to integrate the GBF business, continue to execute our order book safely and secure new work, whilst leveraging our collaborative end to end offering to benefit our clients, people, and our shareholders. 
 
“These initiatives will be supported by continued investments in innovation and technology, and improving the capacity of our human resources through training, all aimed at strengthening both our service delivery and operating efficiency.”

 

--- click on links above for more ---

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#Broker/Analyst Reports
Last edited one year ago

19 June 2019:  Moelis Australia: Macmahon Holdings (BUY): GBF acquisition & Telfer update

EVENT:  MAH has agreed to acquire underground mining contractor GBF for $48m upfront + two potential earnout payments in FY20 and FY21. GBF is expected to generate revenue of $180m and EBITDA of $20m in FY20. The acquisition will be funded by existing cash and the assumption of GBF’s debt; target completion is mid-August 2019. MAH also recently flagged issues at its Telfer contract but reiterated FY19 underlying EBIT guidance of $70-80m and guided to “growth in underlying EBIT in FY20” (pre GBF acquisition).

IMPACT:  Telfer negotiation outcome expected by 5 August 2019. MAH is seeking a rate increase due to changes in the mine plan and remains confident on a positive outcome but should there be any delays, MAH has flagged the potential recognition of a $25-35m non-cash, onerous provision at its FY19 result, representing the future unavoidable costs (based on the current terms) until the expected completion of the contract in Jan 2023 (~$7-10mpa).

Headline GBF acquisition multiples appear attractive. The upfront acq. multiple is 2.4x FY20f EBITDA (~6x EBIT based on MAe) with potential to be reduced by the locked-box mechanism which provides MAH economic exposure to GBF from 1 Dec 2018 (not included in our estimates but conservatively estimated at ~$4m). Further, the earnout cap of $53.5m implies a total acquisition multiple of ~2.5x (or better) based on ~$40m EBITDA. No details were provided on individual contract tenure but our high level analysis suggests an average reserves-based mine life of ~2.4 yrs (6.4yrs on M&I resources). We also note that the upfront component represents “a small premium to NTA” which appears undemanding given the immediate access to mining fleet and skilled workforce. GBF’s FY20f EBITDA margin of 11% is lower than expected but it is understood that there is potential for margin improvement under a more efficient overhead structure.

Small increase to FY20e EBIT to $82m (prev: $81m) to reflect the acquisition offset by our conservative assumption of ongoing Telfer impact with potential upside to our #s from a favourable resolution at Telfer/acquisition synergies.

INVESTMENT VIEW:  The acquisition of GBF increases MAH’s exposure to the higher barrier to entry, underground service offering + provides earnings diversification. At 6.1x FY20e EV/EBIT, MAH appears undervalued – upcoming catalysts include: 1) resolution of Telfer issues; and 2) delivery of FY19 results in line with/ahead of expectations (cons. EBIT: $73m). Retain BUY & $0.30 TP.

--- end of excerpt from Moelis broker/analyst report ---

 

Disclosure:  I hold MAH.  I consider MAH to be one of the lower-risk mining services plays based on a number of long term contracts with clear earnings visability - but also with massive additional upside potential from their huge tender pipeline, of which they have been named as preferred tenderers for the majority of that $7 billion pipeline.  A large percentage of that pipeline is also with MAH's existing client base, giving them a definite advantage over their peers.  I view their pro-active approach to renegotiating the Telfer contract as a positive, as while Telfer isn't one of their bigger contracts, it has the potential to continue to be a minor drag on their earnings (i.e. loss making) into the future if they don't do something about it now.  Some have speculated however that if Macmahon were to make money at Telfer, Newcrest (the owners of the gold mine) would lose money - as Telfer is around breakeven for Newcrest currently, or just barely profitable.  Previous mining contractors there (prior to MAH) have simply walked out - quit the contract and left.  It's a very hard place to work - with a lot of challenges, and as NCM's least profitable mine, and one of their oldest, they are loathe to spend money there; the scuttlebutt I've heard from people who do shutdown work at Telfer (including one of my brothers) is that is barely functional, with loads of downtime, heaps of breakdowns, and usually band-aid fixes that just get them through to the next breakdown.  Newcrest's Sydney-based management just aren't very interested in Telfer, so Telfer lurches from one crisis to the next - and that's just the processing plant.  MAH would love to walk away from Telfer, but they've signed a life-of-mine contract - as they tend to do with many of their clients, so they're likely in it until the end (whenever that might be).

Further reading:  http://www.afr.com/business/mining/telfer-the-contract-macmahon-s-no-longer-wants-to-afford-20190616-p51y8k

If the numbers in that article are accurate, and MAH has been losing around $1m/month at Telfer, then it's little wonder that Mick Finnegan wants to renegotiate the terms of the contract.  Once Telfer is sorted out - one way or the other - I believe the market will then focus on the rest of MAH's contracts - which are all in very good shape - and their huge tender pipeline.

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#Outlook / Guidance
Last edited one year ago
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