Investor Spotlight: mining service providers – a safe port in a macro storm

Article written by Danielle Ecuyer

Macro headwinds for markets from higher bond yields

Rising bond yields under the "higher for longer" narrative, which was reiterated at the Federal Reserve’s September FOMC meeting, has translated into weak equity markets and falling valuations.

The expectation of more stubborn inflation and higher energy prices are supporting what is a seasonally volatile and weak period for markets, and this September is proving, thus far, to be no different.

Dollar weaponisation and OPEC+ blowback

America’s weaponisation of the US dollar and the accompanying sanctions against Russia’s invasion of Ukraine are now facing blowback from OPEC plus. Russia and Saudi Arabia continue to curb oil supplies. Brent Crude recently touched $95 a barrel before easing back to $93. Russia is also restricting diesel exports, which is placing strains on global diesel supplies.

Against this backdrop, materials and resource companies are investing for major secular themes such as the clean energy transition (copper, lithium, critical minerals) and increased global food production (potash).

Supply struggles

As was evidenced in the August reporting season, labour and materials costs, as well as weather-related costs, were a headwind to the mining sector profits. However, the outlook for mining services is more upbeat and provides an alternative way to gain exposure to the resource investment theme and service providers are forecast to pass on any cost imposts.

Three stocks to watch

• Orica: Are earnings at an inflexion point?

Orica, a global provider of explosives and blasting systems for the mining, quarrying, and oil and gas sectors, has recently seen a resurgence. Analysts returned a more upbeat tone post the company’s recent investor day update. Goldman Sachs, in particular, noted that after years of earnings downgrades via price leakage, the new management has put in place strategic changes and sees the company at an “inflexion point.”

Orica weekly chart

Positive macroeconomic tailwinds

This optimism is rooted in more positive macro tailwinds, including stronger commodity prices, supply chain limitations, and firm nitrogen markets. UBS also remarks that Orica is committed to a reduction in its Scope 1 and 2 emissions of at least -45% by 2030 and a near-term reduction of -26% by 2026.

A greener future

Equally noteworthy is Orica's exploration of a hydrogen hub with Origin in the Hunter Valley. Morgan Stanley assesses that Orica’s contract pricing beat 1H23 expectations, and the company is transitioning its Newcastle, Kooragang Island plant to renewables.

Promising prospects

According to FNArena, the company is trading on 15.8x FY24 earnings and a prospective yield of 3.2%. The average target price is $18, representing 16% upside. With strategic changes, eco-friendly initiatives, and a positive outlook, Orica is showing promising prospects in the mining and explosives sector.

FNArena forecast chart

This compares to Refinitiv with a mean target price of $17.86, with 4 Strong Buys, 7 Buys and one Sell.

Refinitiv forecast chart

• Monadelphous: In the sweet spot for lithium contract wins

Monadelphous is a $1.4 billion engineering company that provides construction, maintenance, and industrial services to the resource, energy, and infrastructure sectors.

Monadelphous weekly chart

Monadelphous: A surge in new contracts

Jarden recently upgraded the stock to an Overweight from Neutral with the company winning $260 million in new contracts over the last two weeks, bringing the total to $610 million in new contracts in the first three months of the 1H24.

Citi expects Monadelphous will announce a total of $1 billion to $1.4 billion in new contracts with pickups in the lithium and rare earth space. Macquarie upgraded the stock to a Buy after the strong FY23 results and is looking for growth in Construction revenue in the 2H24 and Maintenance revenue, which represents 71% of total revenue.

FNArena has the stock trading on a 19.6x prospective multiple and a 4.3% yield with an average target price of $14.68.

FNArena forecast chart

Refinitiv’s mean target price is $14.35 with 3 Strong Buys, 3 Buys, and 3 Holds.

Refinitiv forecast chart

• Mineral Resources: It’s not all about iron ore and lithium

Mineral Resources is valued at $13.4 billion and is a diversified mining services company with construction, crushing, and transport services. Although the iron ore and lithium businesses represent the main earnings drivers, the services division is nevertheless sizeable, and they specialise in Build, Own, Operate as well as Crushing Mining Services.

Mineral Resources weekly chart

Prospects for Mineral Resources: Iron ore and lithium

The recent FY23 results were weaker than expected, but looking forward, analysts expect iron ore and lithium, notably Onslow and the ramp-up of Wodgina, to boost earnings.

Mineral Resources also recently purchased Bold Hill from receivers, which offers them a processing hub in the Eastern Goldfields of WA. According to Blackwattle Investment Management, Onslow could add as much as $35 per share, although Morgan Stanley expresses concern that earnings remain vulnerable to the vagaries of commodity prices.

There are quite some discrepancies in broker price targets, and FNArena has an average target of $78.57 with Macquarie as high as $92. The prospective PER is 14.5x and a 2.9% dividend yield for FY24.

FNArena forecast chart

Refinitiv has a mean target price of $77.35, with 3 Strong Buys, 7 Buys, 3 Holds and 2 Sells.

Refinitiv forecast chart