Market Update & Important Indicators
Energy shares fell after a meeting of oil-producing nations ended without capping output, while U.S. stocks swung between small gains and losses. Some analysts said the muted moves suggested investors were wary of making big moves ahead of Friday's jobs report, which could offer hints about the pace of interest-rate increases. Some oil producers had floated the idea of reintroducing an output limit. OPEC scrapped its production ceiling in December, helping to send oil prices to 13-year lows. Since then, oil prices have staged a steep recovery, with U.S. crude rising around 87% from a low hit February 11.
European blue-chip stocks managed a small gain after a up-and-down session. Stocks vacillated amid a pair of important meetings from the European Central Bank, which issued its monetary policy statement and the Organization of the Petroleum Exporting Countries, which offered no new plans to stem a glut of crude oil that has dogged global markets. The Stoxx Europe 600 ended up 0.1% at 344.35 but darted between gains and losses after the ECB met expectations by holding its main interest rate on refinancing operations at 0%. It also left the deposit rate it charges banks to hold money overnight at minus 0.4%.
Japanese stocks slumped as yen strength persisted Thursday, while shares elsewhere in Asia were mostly higher. Japan's Nikkei Stock Average ended down 2.3%. Korea's Kospi rose 0.1%, Hong Kong's Hang Seng Index gained 0.4% and the Shanghai Composite Index was up 0.4%. Stocks in Japan fell as the yen extended gains against the U.S. dollar. The currency had strengthened late Wednesday after Prime Minister Shinzo Abe put off a national sales-tax increase , scheduled for next year, until October 2019. The yen was as strong as 108.82 to the U.S. dollar during Asian trading hours, the strongest since May 18. In China, stocks rose on continuing hopes that global index provider MSCI will soon add mainland-listed stocks to an influential index.
Australian shares fell for a third day running Thursday, hitting a four-week low as banks and mining stocks led another round of broad selling. Extending a weak start to June, the S&P/ASX 200 finished 44.3 points, or 0.8%, lower at 5278.9. The slide comes after the index hit a nine-month high Monday, and notched a third consecutive monthly advance in May.
Copper futures closed lower in London on Thursday after a day of range-bound trading. The London Metal exchange's three-month copper contract was down 0.54% at $4,617 a ton at the PM kerb close. Other base metals were mixed. Aluminium was down 1.8% at $1,528 a ton; zinc was up 0.6% at $1,980 a ton; nickel was down 0.60% at $8,429 a ton, and lead was up 0.4% at $1,712 a ton.
Thought of the Day:
Corporate Activity – Hotting up?
• Currently at a cyclical low in the mining sector
• Many services businesses have significant leverage to an upswing
• Mergers / acquisition activity on the rise as:
– Companies appear undervalued on longer term view
– Vendors rationalise and / or strengthen balance sheets
– Consolidation provides opportunity to take out further costs
– Diversification reduces earnings risk
ALQ “under the microscope”
ALS Limited (ALQ) climbed 27% yesterday on the back of an unsolicited private equity offer for the business. The $5.30 cash bid, at 11.7x FY17F EBITDA and 23x FY17F EPS, came from Advent International and Bain Capital, valuing the business at $2.7b. ALQ was quick to reject the “opportunistic” offer, noting it didn’t reflect ALQ’s global leadership positions, was at an insufficient price premium, and didn’t reflect current trading or recent transaction multiples.
ALQ is a global provider of testing and analytical laboratory services and generated $1.4b revenue and underlying EBITDA of $264m in FY16 (year end March). The business has four core business streams. Most revenue comes from the Life Sciences division, with around another third contribution coming from ALQ’s dominant
No doubt ALQ’s global peers, like SGS (US$17.0b market cap), Bureau Veritas (US$9.6b), Intertek (US$7.4b) and Core Labs (US$5.3b) will have taken note of the bid. Given these companies’ relative sizes and ALQ’s strong global footprint, the rejection of yesterday’s offer may not mark the end but the beginning of a period of heightened corporate interest in the Company.
Mining at a cyclical low
ALQ notes that the bid comes at a record low point in the cycle for the Minerals segment. We suspect this would have been a key consideration for the bidders, recognising the significant leverage to a sector rebounding of cyclical lows. ALQ notes that the Minerals’ segment has been significantly enhanced by the recent efficiency improvement initiatives and is well positioned to benefit from a recovery.
Four good reasons to expect ongoing corporate activity in mining services
1. We have noted before that the market has in the past tended to put mining services on high multiples in the boom times and low multiples during the troughs, when it should be the opposite. This creates opportunities and we believe that the leverage to a mining upswing alone provides good reason to expect a period of elevated corporate activity.
2. However, there are other reasons for a period of heightened M&A. The good times can lead to bloated businesses and stretched balance sheets. In these cases the trade sale of a business achieves the twin goals of rationalisation (getting back to core) and reducing net debt. Two recent cases in point: Ausdrill (ASL) recently sold its DTA business for $66m (see “Walking the talk”, 20 May 2016), and Austin Engineering (ANG) sold COR Cooling for $14m (see “Sells COR”, 18 May 2016 and “Recapitalisation”, 26 May 2016).
3. Once a mining services business has done all it can to remove costs and extract efficiency gains, consolidation provides a further opportunity to remove cost duplication. This is typically easier said than done, as the key rationale means corporate overheads (jobs) are at stake, particularly at senior levels.
4. Alternatively, for a company with a core business that is struggling, the acquisition of a complimentary business with better prospects diversifies earnings streams and reduces risk. The most obvious examples can be found amongst those resource-exposed construction companies that had to find work in other sectors post the construction boom. Often this occurred through acquisition. Anecdotal evidence suggests there is still a desire to add complimentary earnings streams via acquisition.
The period of corporate and investor disinterest in the mining services sector looks to be coming to an end.
Recent Contacts & Presentations
Cradle Resources (CXX), Saracen (SAR), Gold Road Resources (GOR), Regis Resources (RRL), Gascoyne Resources (GCY), Botanix (BNE), Sino Gas & Energy (SEH), Altura Mining (AJM), Navitas (NVT), Gage Roads (GRB), Bionomics (BNO), Invigor Group (IVO), Marindi (MZN), Cardinal Resources (CDV), Galaxy Resources (GXY), Cooper Energy Limited (COE)
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