FOCUS POINT: MINING AND ENERGY SERVICES

Written on the 7 March 2012

FOCUS POINT: MINING AND ENERGY SERVICES

IT was evident from the recent reporting season that increases in expenditure by those in the mining and energy sector appears to finally be paying dividends for service providers to those sectors.

Many investors and analysts have long been talking about the opportunity to gain diversified exposure to international demand for Australia's commodities through domestic mining service providers.
However, judging by the latest reporting season including the results of Ausdrill, Boart Longyear and others, it appears that this strategy has only started to come to fruition in the past six months as miners and others have once again begun committing to significant capital expenditure.

Ludowici – an example

One example of the significant value that is being attributed to providers in this sector and the desire for international firms to obtain exposure to it, can be seen in the recent takeover bids received by the Brisbane based firm Ludowici Limited (LDW) from FLSmidth & Co. and Glaswegian engineering firm Weir Group.

Not only was the initial bid received from Weir at a premium of more than 100 per cent to Ludowici's share price, both Weir and FLSmidth have subsequently raised their bids to $10 and $11, valuing Ludowici at $352 million and $388 million, respectively.

While there are currently proceedings with the Takeovers Panel in relation to Ludowici, specifically as to whether FLSmidth was able to raise its bid due to concerns under the 'truth in takeovers' policy, it is clear both bidders have valued Ludowici significantly more than the market generally.

While both bidders are no doubt eager to gain access to Ludowici's exposure to the growth in the Australian resources sector, both parties appear to be pursuing Ludowici as a strategic acquisition.

While Ludowici certainly provides exposure to the Australian resources sector, the firm’s specialist design and manufacturing capability also provides both bidders with an avenue to expand their current offerings into the coal processing sector as-well as strengthening its existing global operations – with over 30 per cent of Ludowici's 2011 revenue being sourced from offshore including Africa, China and India.

Key risks and opportunity

While many predict growth in the mining and energy sector will continue in line with international demand for commodities, some advisers are weary of current valuations despite strong earnings growth as a result of the significant competition and high costs facing players in this market.

As a result, operators in this space need to be vigilant about how their business is growing and the key risks it may present.

As noted above, the valuation of Ludowici by both bidders appeared to be driven not only by Ludowici's strong order book, but also its specialist technology and expertise – which complimented each bidder’s business.

By continuing to invest in your core technology and skill base, not only will this enhance your ability to secure domestic contracts in the immediate future but also help reduce exposure to any slow-down or shift in international demand for Australia's commodities – increasing the core value and ongoing sustainability of your business.


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