What's new? With the gold price moving up, companies exposed to the production phase of gold mining are in a good spot. Ausdrill's recent full-year results certainly demonstrate that the mining services company is well positioned to benefit, but the share price has been tipped off balance for the wrong reasons.
Ausdrill reported a full-year net profit of $112.2 million - an increase of 53 per cent over the previous year. The company declared a fully franked final dividend of 8¢ per share, taking the full-year dividend to 14.5¢ per share.
This week, the company also gave an indication that it is close to finalising a $550 million refinancing of its debt facilities.
Providing a diverse array of services to the mining sector, Ausdrill fits the bill of a ''picks and shovels'' company. Most of its business exposure is to the gold-mining sector, which contributes more than 60 per cent of the company's revenue. Importantly, this exposure is mostly to the steadier production phase of the gold-mining companies - not exploration.
As such, Ausdrill enjoys a more predictable revenue stream based on equipment hire, drilling and blasting, earth moving, water management, and a wide variety of support services in the production of gold mining.
Further underpinning the reliability factor of Ausdrill's earnings is its exposure to the top end of town in terms of its major customers - which include BHP Billiton, Rio Tinto and other large, diversified miners.
Outlook Ausdrill is in a good position to consolidate further gains in its sector, recently acquiring mining equipment hire business Best Tractor Parts (BTP) for $165 million.
BTP, which made a profit of $38 million last year, complements Ausdrill's own equipment-hire business and will extend its fleet of vehicles from 117 to 194, as well as adding capability to the group's maintenance and service operations.
Ausdrill is expecting revenue growth of 15 per cent next year, excluding the impact from the inclusion of BTP, with similar operating margins.
Meanwhile, Ausdrill is extremely well placed to withstand any business headwinds. The company has cash of $124.2 million and conservative gearing of 24.5 per cent.
Price Ausdrill shares had a fairly positive start to the year, moving from just under $3 to a high of $4.27, before settling back to about $3.40 in recent months. However, that all changed a few weeks back with the shares free-falling to lows of about $2.65. The rather severe share price reaction was associated with peer Boart Longyear's revised earnings guidance. This company has many similar characteristics to Ausdrill, perhaps providing some basis for a drop in the share price. But taking a medium-term view, we believe such a reaction is unjustified.
Worth buying? With the prospect of further central bank stimulus and rising inflation, the gold price looks set to continue marching ever higher. This will provide genuine confidence for earnings of gold-mining companies. With more than 60 per cent of the company's business coming from this sector, Ausdrill should be a key beneficiary in such event. While recovering somewhat in recent weeks, we think the drop in the share price represents an opportunity to buy into Ausdrill. The shares are trading on an earnings multiple of about six times, with a prospective yield of more than 6 per cent.
Greg Smith is an analyst at Fat Prophets sharemarket research.
