Perenti: The ‘Underappreciated’ Mining Services Opportunity, Tied to Gold with Reliable Dividends

Mining Services Outlook: Opportunities in Valuations and Contracts

Mining services companies present a compelling investment opportunity, particularly as many are currently valued attractively and offer robust cash flow. With increasing demand for minerals underpinning global electrification and gold prices, these companies are attracting attention from value-focused investors. Research from Bell Potter in January 2025 has highlighted major players, Macmahon and Perenti, as notably undervalued with forward price-to-earnings ratios of 6.8 and 9.7 respectively.

Both of these firms are particularly involved in the gold sector and typically entail higher capital expenditures to maintain their operations. While MacMahon’s performance has been static this year, Perenti has experienced a resurgence, catalysed by securing significant contracts with gold mining clients.

Perenti’s Transformation: From Challenges to New Opportunities

Perenti’s shares had largely been stagnant since mid-2020 but have recently surged following the announcement of critical new contracts. The company faced a few hurdles over the past year which showcased the typical volatility within the mining services sector:

• Contractual Setback: Perenti’s subsidiary, Barminco, lost the Zone 5 underground mining contract in Botswana, initially valued at approximately A$800 million over five years. Despite generating more than A$1 billion in revenue, this loss in June 2020 was a major setback.

• Financial Performance: The first-half FY25 results did not meet market expectations, leading to a 15.6% drop in Perenti shares. A backlog of A$42 million in late debtor collections adversely impacted free cash flow, although it was resolved in the second half of FY25.

In contrast, recent contract wins have significantly altered Perenti’s outlook, as illustrated below:

This contract influx, alongside a favourable gold price environment, has enabled Perenti shares to rebound by 15% year-to-date, reaching a five-year peak.

Insights from Perenti Management

In a conversation with Jono van Hazel, Perenti’s Head of Investor Relations, several focal points were raised:

• Dividend Policy: Perenti targets a 30-40% payout of underlying net profit after tax, projecting a dividend yield of approximately 4% for FY25-27. Having reduced leverage below 1.0x, the firm has reinitiated dividend payments and started share buybacks.

• Valuation Perspectives: Perenti’s management perceives the current share price as undervalued despite recent gains. They attribute this to the company’s robust operational capacity and scale, especially through its diverse service offerings, including world-class underground mining operations via its subsidiaries.

• Capital Expenditure Management: The claim that capital intensity has been overstated by others was made. Notably, while the company heavily invested in FY22, this led to substantial free cash flow in succeeding years. Their operations are predominantly underground, which possess lower capital requirements compared to surface operations.

• Impact of Gold Prices and Opportunities: Although tender processes remain unchanged by gold industry prices, there’s an uptick in client demand as more gold-focused enterprises pursue expansion strategies. Continued activity in production drilling and exploration is apparent.

• Contract Extensions: Newly acquired contracts involve minimal growth capital requirements, predominantly being extensions of existing projects budgeted in FY25.

Looking Forward: Future Pipeline and Growth Potential

Citi analysts have highlighted several upcoming contract renewals that could fuel further growth for Perenti:

• Cowal: $520 million, 4-year contract for underground work with renewal negotiations in progress.
• Dalgaranga: A 10-month underground exploration drill contract commencing in 1Q25.
• Ernest Henry: Expected procurement for underground developments in FY26.
• Geita: Anticipated renewal process for underground services in mid-FY26.

AnaIysts predict steady revenue growth, with new contracts likely compensating for the financial shortfall caused by the loss of the Zone 5 contract. Projections for Perenti’s financial performance indicate a solid growth trajectory from FY25 to FY27, detailed in the table below:

In summary, the mining services sector, underpinned by the evolving landscape of gold and other critical minerals, presents a fertile ground for investment, especially for those willing to navigate its inherent volatility.