There has never been a better opportunity for private-equity firms betting on a mining rebound in Australia to acquire suppliers of excavator parts and drills from Bradken Ltd. (BKN) to Boart Longyear Ltd. (BLY)
After the peak of a decade-long commodity boom in Australia, the world’s biggest iron ore and coal exporter, mining companies including BHP Billiton Ltd. (BHP) and Rio Tinto Group are cutting spending. That’s squeezing suppliers such as Bradken, reducing its market value to $1 billion and creating affordable targets before exploration rebounds, said CIMB Group Holdings Bhd. (CIMB) Australia’s mineral and energy export earnings are forecast to grow an average 11 percent in the next five years.
“The only time you can reasonably pick these things up is at times like these,” Matthew Nicholas, a Sydney-based analyst at CIMB, said in a phone interview. “What we’re seeing right now is purely cyclical. I would be very surprised if people weren’t looking.”
A buyout firm could fatten profit margins at Newcastle, Australia-based Bradken by directing production to its low-cost Chinese foundry, said BBY Ltd. Boart’s 1,035 drill rigs, most of them lying idle, may draw bargain-hunting suitors, Morningstar Inc. (MORN) said. Private-equity firms would have a chance to profit by improving operations as both companies’ returns on invested capital have never been lower, according to data compiled by Bloomberg.
Formed in 1922 with the horseracing winnings of two steelworkers, Bradken made tank hulls during World War II. Previously owned by Australia’s Champ Private Equity, the company counts General Electric Co. and dump-truck maker Caterpillar Inc. as clients, according to its annual report.
Earnings for the year ended in June fell 33 percent to A$66.9 million ($64 million), Bradken’s smallest profit since 2009. At its Chinese plant in Xuzhou, production of rail cars to haul iron ore and coal almost halved as demand slowed.
Bradken’s Xuzhou foundry, which makes pieces of track for diggers, is using only 25 percent of its capacity, BBY analyst Moira Daw said in an Oct. 11 report. Even after cutting back on exploration, mining companies will need Bradken’s components to increase output at existing mines, according to Daw.
As Bradken focuses on supplying spare parts and repairs, net income will surge 34 percent in the year ending June 2014, according to analysts’ estimates compiled by Bloomberg.
“We’re now seeing more maintenance opportunities emerge and you want to be leveraged towards companies that are exposed to that,” Jonathan Snape, an analyst at Bell Potter Securities Ltd. in Melbourne, said in a phone interview.
Bradken Managing Director and Chief Executive Officer Brian Hodges didn’t respond to a message seeking comment on potential bids.
The Australian Financial Review said Oct. 4 that Wichita, Kansas-based Koch Industries Inc. may have expressed interest in Bradken. Bradken said Oct. 11 it wasn’t in talks with any party about a takeover.
In the five years ending June 2018, Australia’s mineral and energy exports earnings will grow an average 11 percent each year to A$294 billion, the country’s Bureau of Resources and Energy Economics said in a report released Oct. 2.
“As volumes pick up, they will be a beneficiary,” Sydney-based Daw said by phone, referring to Bradken. Sales growth will resume at Bradken in 2015, Daw said in her report.
Until then, annual expenditure by the world’s 20 biggest mining companies by market value will drop by about a third to $66 billion in 2015 from 2012, according to forecasts compiled by Bloomberg last month.
The current distress among mining-services companies means Boart and Bradken are obvious targets, Ross MacMillan, an analyst at Morningstar in Sydney, said in a phone interview.
“It’s certainly the sort of time you’re likely to see private equity come and bargain hunt,” he said. “Some of these businesses have built up really good assets.”
Perth, Australia-based Emeco Holdings Ltd. (EHL), which rents out Caterpillar dump trucks, has already brooked an approach. The A$192 million company said last month that talks with private-equity firms ended in May after they made initial proposals.
Boart, which counts Melbourne-based BHP as a customer, traces its roots to 1890, when Edmund J. Longyear began drilling at an iron-ore deposit in Minnesota.
The exploration slowdown has left more than half of Boart’s drilling rigs unused, the Salt Lake City-based company, which trades in Sydney, said this month. The company will post a loss of $231 million this year after cutting jobs and writing down the value of equipment, according to analysts’ estimates compiled by Bloomberg.
A new private-equity owner could sell Boart’s drill-making business to repay debt, said MacMillan at Morningstar. That would leave a drilling-services unit that might be sold or listed once exploration rebounds, he said.
“Sometimes you just need to take companies out of the public space,” said Daw at BBY. She estimated Boart’s manufacturing unit might fetch $350 million (A$363 million), 85 percent more than the company’s entire market value.
A representative for Boart in Sydney declined to comment on potential takeover offers.
Boart’s return on invested capital, a measure of how well it uses its money to generate profit, was 7.4 percent in 2012, a record low and down from 22 percent in 2008, data compiled by Bloomberg show. Bradken’s return was 5.6 percent in the year ended June, also a new low. The figure was 18 percent in 2007.
“Picking the bottom is a very difficult game,” said Nicholas as CIMB. “You may not be at the bottom but you’re certainly a lot closer than we were a year ago.”
As of September, Boart had about $540 million of net debt, more than twice its market value, and the company said this month that demand for its drills hasn’t stopped falling. Bradken, which said it had net bank debt of A$425 million at the end of June, said Oct. 22 that mining companies continue to crimp investment.
Under these conditions, Bradken and Boart may be unable to fend off suitors, said MacMillan at Morningstar.
“They’re going to be the companies that are picked off,” he said.
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