Wednesday, July 3, 2013

Opportunities in the Shovels and Picks? BLY:asx BOARF:us $BOARF

Much has been written about the California gold rush in the 50's when people abandoned families in the search of the great wealth in the area.

While the success rates were low, people were attracted to the potential of going from zero to hero in the matter of discovering the gold nuggets that were the stuff of dreams.

What many didn't realize, several of today's empires were build on the masses flowing to the California area, not on the actual gold discoveries.

Levi Strauss (1829-1902) was a Bavarian immigrant who, during the California Gold Rush, went into business as a dry goods wholesaler on San Francisco's Market St. Coincidentally In 1853, Strauss began making durable trousers for miners from heavy brown cloth. His firm later switched materials and created the first denim blue jeans in 1873, catering to working men who needed tough garments that would withstand hard manual labor (the company's slogan in 1900 was "For Men Who Toil").
Today, the group is the world's largest pants manufacturer, arguably larger than many of the gold mining companies that were around during the same time.

By this analogy, perhaps during the commodity cycle, one great way to play the markets is via the shovels, picks, and the service companies.

What do you hear when things are busy with the mining markets? Investors are waiting for two things - assay results and drill results.

Boart Longyear (BLY on ASX Australian Exchange, BOARF on the US OTC)  was one of the largest integrated drilling companies globally.
With over 1,000 rigs and just under USD $2 billion annually, they dominate in terms of size compared to many of the TSX Venture and TSX-listed drillers we've mentioned here before.

Unfortunately, their fortunes has not been kind to them lately.
 In the last 2 days - Moody's had just downgraded Boart's credit ratings, leading off a selling frenzy, dropping their market cap another 25% so far at time of writing.

With an EBITDA forecast of 2013 for a low of $199 million - $271 million, it's currently trading at ONE time EBITDA/EV. We believe this is an attractive valuation and will recommend pulling the trigger around August.

At this price, there might be issues of waiting too long and seeing some of the institutional investors in Boart pull out and take the deal private.

Why we like it:
Largest in the sector - with this many operations across the globe, it's almost prescribing to the too big to fail model. Look at the intrinsic value and the revenue generating ability.

Diversified service - that is underappreciated. Beyond drilling services, several of the drilling companies use Boart drills, and also their tooling and drill rod/supplies. If this is not vertically integrated I don't know what is.

Trading at discount - at one times EBITDA, it doesn't get much cheaper.
The 14% Yield is nice to have, but don't count on it.

Rating : BUY at dips. $0.39 bottom range

Taking a stroll down memory lane, in 2006 Boart went public and made a huge amount of money for its investors in the PE fund.
Advent PE fund purchased it from Anglo American for just over $500 million 1.5 years and very quickly realized tremendous value, netting nearly a billion dollars. Not bad returns? (Reference)
Advent International to acquire Boart Longyear from Anglo American for $545m
8 Jun 2005
Mid-market buy-out firm Advent International has agreed to acquire Boart Longyear, a provider of drilling services and equipment, from Anglo American. The enterprise value of the transaction is $545m. The investment is the first to be made from Advent's latest €2.5bn global buy-out fund, which closed in April.
Boart operates from sites in 38 countries across Europe, the USA, Canada, Latin America, the CIS, the Middle East, Asia Pacific and Africa. Opportunities for further growth exist in areas including the emerging markets, where there is growing demand for mined minerals.
Dave McKenna, partner at Advent, said ‘Boart Longyear is a widely acknowledged global market leader in the mining industry, with a deserved reputation for outstanding customer service and an exemplary health and safety record. Strategically advantaged by its provision of both services and equipment, it’s a fantastic platform from which to capitalise on current industry growth trends and to build an industry-leading diversified drilling services business.’
Humphrey Battcock, also partner at Advent, added, ‘Companies like Boart which have historically operated as smaller divisions of larger parents are exciting to work with and offer significantly untapped potential. In parallel with a program of operating improvements, we will be employing a three-track growth strategy that will focus on consolidating Boart’s leadership through a series of strategic acquisitions, increasing market penetration in under-represented territories, and diversification into non-mining drilling services where there are strong synergies with the company’s core areas of expertise.’
Copyright © 2005 AltAssets

I'm sure there are some players on the sidelines itching to do a deal like this again. If you're along for the ride, there could be some good gains here for a real operating business in the mining sector.

Similarly in the space - we have mentioned boutique specialty driller Energold Drilling (EGD.VN EGD.v, EGDFF OTCBB).

Why we like them:

Undervalued. Trading at 20% discount to Net Book Value. Stock has some life here around $1.50 and seems to have rebounded from the base resistance.
Market cap is around 

Unique competitive advantage in mobile modular drilling solutions for early stage projects, but catering to large players for security of revenue stability.

EGD's small portable rigs in display - minimal environmental disturbance and get more holes for the same $ spent for miners

Diversified business. 
In 2010 - 100% of the revenue came from mining drilling.
In 2011 - over 80% of the business was mining, 20% was energy and manufacturing.
2012 it was 54% mining and 46% energy/manufacturing.

Fast growth in Oil Sands energy segment
We will elaborate further in future reports - but Alberta spent over $26 billion on exploration and development in oil sands in 2012.
Comparison to the global expenditure of Metals explorations (as compiled by Metals Economics Group), it was paltry $20 billion, across the globe!
Company states they have a niche service in the energy services sector - given how small a pie they hold a continued oil sands boom should continue to benefit Energold, even if mineral suffers for the next 6-12 months.

Rating : BUY at dips. $1.50 bottom range