What the Brokers Say
WHAT THE BROKERS SAY: Interesting news and views from across the Resource Analyst universe.
Website: www.hartleys.com.au
AUSDRILL LIMITED (ASX: ASL)
AUMS downgrade, but other businesses are okay
Ausdrill has downgraded FY14 normalised NPAT guidance to $25 million to $30 million from previous normalised NPAT guidance of $35 million.
The downgrade is due to underperformance of the African Underground Mining Services (AUMS) 50/50 JV with Barminco.
AUMS generated $35m (100%) of EBITDA in 1H14 ($5.2 million net income to ASL), but we expect that it will be barely EBITDA positive in 2H.
We understand that Barminco has now replaced the top operational managers of the JV.
ASL says that their other businesses (which were greater than 85 per cent of FY13 earnings) “have generally been performing in line with management expectations”, which is very encouraging for improved medium term earnings certainty.
Hartleys expects FY14 NPAT $26.2 million, FY15 $50 million
We have revised our FY14 NPAT to $26.2 million, (group EBITDA of $198 million, covenant EBITDA $179 million).
We have lowered our FY15 NPAT to $50 million by assuming AUMS margins rebound but remain lower than our previous assumption given the commentary about the aging fleet raises concerns.
We expect FY15 group EBITDA of $234 million, covenant EBITDA $214 million.
We estimate that if “covenant EBITDA” falls toward approx. $150 million the covenant pressure increases.
However, the covenants are only for the revolving cash advance facility, for which only $65 million is currently drawn.
The other facilities are asset backed or, in the case of the US$300 million unsecured notes, covenant light.
In our view, ASL remains well positioned for a cyclical improvement, and the financial leverage remains manageable, on current earnings estimates.
It is hard to imagine that we are not at the bottom of the earnings cycle for ASL.
ASL is a complicated business (not least the financial accounts, for which we have three measures of EBITDA).
However, part of the reason for the complications is the diversity of the company, although financial leverage doesn’t help.
We continue to believe that ASL is a well-run business that “deserves” to make an economic profit.
Hence, when the cycle turns we expect ASL earnings to rise significantly.
Superficially the leverage looks like a substantial risk, but on closer inspection the capital structure doesn’t appear to have short term (next two year) risks.
Website: www.breakawayresearch.com
Vital Metals (ASX: VML)
Vital Metals continues to progress its Watershed Scheelite project in North Queensland with key points of the current DFS expected to be finalised by mid-2014, and a final investment decision by the end of 2014.
Although originally conceived as a one million tonne per annum operation, the scope has been expanded to three million tonnes per annum to take advantage of economies of scale and the large JORC-compliant resource.
Our modelling indicates a robust project, which will withstand reasonable adverse movements in key financial parameters.
Tungsten consumers see supply risk for the metal given the Chinese concentration of production bans on concentrate exports and restrictions on APT exports, and thus are keen to diversify their supply base, with Watershed being ideally placed to tap into this potential demand.
Vital Metals’ (ASX: VML) flagship project is the Watershed Scheelite project in North Queensland, which is one of the 10 largest un-exploited tungsten deposits in the world.
It has a measured, indicated and inferred JORC-compliant resource of 49.3 million tonnes at 0.14 per cent tungsten for 70,400 tonnes of contained tungsten.
Vital Metals has a key partner in the Japan Oil, Gas and Metals National Corporation, which has earned a 30 per cent interest in Watershed through funding the current Definitive Feasibility Study to $5.4 million, and will act as match-makers to source potential offtake/funding/development partners to take the project through to production.
Vital Metal’s second string is the 100 per cent interest in four gold tenements in Burkina Faso, collectively termed the Doulnia project.
The tenements are located over units of the Birimian Greenstone Belt, the host to a number of world-class gold deposits.
Drilling to date has returned very encouraging results.
We continue to rate Vital Metals with key medium term price drivers including attracting a suitable partner to help take Watershed through to production, which should result in a significant rerating.
Shorter term momentum should be gained from the release of a positive numbers from the current DFS.
Disclaimer: The above is intended as a guide only. The Roadhouse accepts no responsibility for investments made from this advice, successful or otherwise.
The views, opinions or recommendations of this article do not in any way reflect the views, opinions, recommendations, of The Resources Roadhouse.
The Roadhouse makes no representation or warranty with respect to the accuracy, completeness or currency of the content. The content is for educational purposes only and does not constitute financial advice. Independent advice should be obtained from an Australian financial services licensee before making investment decisions.