Investment Matters

Notable company news over the week


On Thursday, Emeco announced that it will acquire underground mining services company Pit and Portal. The company will acquire Pit and Portal for a total consideration of $72m (consisting of $62m in cash and $10m in Emeco shares).

Western Australian based Pit and Portal provides underground mining services and equipment to and generated an pro forma operating profit (EBITDA) of $20m in F1-20.

As part of the merger, Emeco is looking to raise $65m in equity via an entitlement offer.

The combined entity is expected to benefit from a shared rental fleet and workshop/rebuild capabilities as well as technology (including tele-remote and autonomous equipment).

The acquisition also expands Emeco’s services into a new market in underground mining.

Demand for underground mining is expected to continue to grow.

Advances in underground mining techniques, machinery and technology have improved the economics of underground deposits, with mining operations becoming increasingly cost-efficient and safe.

The trend towards the discovery of major deposits at increasing depths can be seen below:


Source: Emeco, MinEx Consulting


The acquisition of Pit and Portal also serves to further diversify Emeco's underlying commodity exposure (boosting its Gold exposure to 27%).


Source: Emeco


With respect to performance in the first half of FY-20, the Emeco announced it has achieved an operating profit (EBITDA) of $119m. This was in line with the guidance it provided in November of between $118-120m. Furthermore, the company continues to anticipate growth in operating earnings in the second half of the year (2H-FY20).

As such, it has confirmed it is still on track to achieve its FY-20 leverage target of 1.5x (Net Debt/Operating EBITDA).  

In what is a testament to the progress the company has made over the past few years, ratings agency Moody’s also upgraded Emeco’s credit rating (to B1 from B2).

The ratings agency cited the company’s improved credit profile due to improved earnings and margins.

It noted that this has been due to both an improvement in the equipment rental market (improving rates and demand) as well as previous earnings accretive acquisitions it has carried out.

This most recent acquisition is expected to help facilitate Emeco’s ongoing deleveraging in a similar fashion.

New investment: Lynas Corporation

This week, we added a new name to the Australian Equities Portfolio: Lynas Corporation.

The company

Lynas is a producer of rare-earth metals – predominantly Neodymium (Nd) and Praseodymium (Pr) (which constitute a majority of its revenue).

Paradoxically, “Rare earths” are in actuality relatively abundant in the earths crust, though they are largely dispersed. This means deposits that are viable to mine typically contain “clusters” of these elements and are relatively rare.

Rare Earth elements are typically used in the production of robust magnets and are used ubiquitously in modern electronics such as hard disk drives, MRIs, electric motors, fibre optics, medical devices and generators. As such, demand for these elements is anticipated to grow over the coming decade, driven by the adoption of electric vehicles, growth in automation and appliances as well as renewable energy.

Lynas’ deposit (Mt Weld) is located in Western Australia and is one of the worlds' highest-grade Rare-Earth deposits globally. Subsequently, Lynas is one of the world’s second-largest Rare Earths producers and importantly, the only Rare Earths miner and processor outside of China.

The company processes mined elements in its plant located in Kuantan, Malaysia, however a part of the processing chain is being relocated to Western Australia.

What we like

  • Exposure to resources that benefit from emerging secular growth thematics: predominantly electrification of transport and adoption of renewable energy.
  • The strategic value of its assets - given the relative rarity of concentrated deposits and the company possessing a fully integrated supply chain that is independent of China.
  • Recent partnership with U.S. based Blue Line to process Rare Earths in the USA, providing a second processing site close to the US market for heavy rare earths.
  • Significant barriers to entry given the scarcity of economically viable deposits, high capital intensity and time taken to ramp up production.

Please note:  Your investment in Lynas is anticipated to appear on the Client Portal on Saturday (1/2/20).

Plus, a quick note re: Woolworths…

Clients will note that we recently made a small investment in Woolworths Group. We noted that Woolworths currently owns both Endeavour (BWS, and Dan Murphy’s) as well as ALH – which consists of a number of hotels, pubs and gaming venues.

However, it is also worth highlighting that Woolworths Group is currently undertaking plans to demerge, sell or float its entire bottle shop, pubs and poker machines business (called Endeavour Group) in the coming months. Our initial investment was made with this in mind, as our focus is primarily on the company’s food and retail assets.

Shareholder approval has been received for the reorganisation, and further information about the final timeline for disposal is expected in the coming month.

In December the Chairman outlined the reorganisation:

  • “…. to achieve this, we need to undertake a series of structural changes within Woolworths.
  • Today’s Restructure Scheme Resolution is the first stage of the Endeavour transformation that will enable us to create Endeavour Group through the combination of our drinks and hospitality business, Endeavour Drinks and ALH Group.
  • The Restructure Scheme is subject to approval by Shareholders today, and by the Federal Court later this week. If approved by both, we intend to implement the Restructure in early February 2020.
  • Our third and final stage will be the separation of Endeavour Group by way of demerger or other value accretive alternative. Any separation is currently expected to take place in calendar year 2020.

Based on this commentary, and given relatively buoyant market conditions we would expect the company’s plans to be announced soon.

Once these plans are finalised, stocks tend to “impute” any value created very quickly into the share price.

Hence there may be an additional benefit of First Samuel investing prior to any announcement.


- Paul Grace