Hidden gems

SUSTAINING growth long term has become the focus for the new generation rising stars of Australia's mining technology, equipment and service sector, currently enjoying rapid expansion on the back of the global mining investment boom. By Richard Roberts*
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Chris Harvie of Datem Moore, right, is welcomed to the company by chief executive John Moore.

Richard Roberts

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Backed by private and public equity markets, a rich vein of Australian innovation is producing strong export sales, plenty of jobs and – most tantalising of all – the prospect of a stable domestic mining support industry that might not be completely swept up by the international merger and acquisition broom presently passing through the sector.

Already in the past six months, Newcastle coal mining machinery maker Hydramatic Engineering, Brisbane-based software developer Mincom and Perth software firm Surpac-Minex have been acquired (or are in the process of being acquired) by foreign entities.

But a cluster of companies generating $A20-50 million a year of sales are on a course to turn the tables and become dominant global niche market players.

The list is headed by equipment training simulator developer Immersive Technologies, gravity-process equipment maker Gekko Systems, software firms Micromine and Maptek, remote control systems supplier Remote Control Technologies (RCT), mine communications specialist Mine Site Technologies (MST), and software and consulting firm Runge.

Immersive, Gekko, Micromine, Maptek, RCT and MST are all No. 1 or 2 in the world in niche technology and service markets, with Micromine earning that ranking through its PITRAM mine production management product, and Gekko through its supply of gravity concentration equipment.

Maptek is one of the largest remaining independent mining software suppliers in the world and its Vulcan product is an international market leader.

Runge is a developer and supplier of specialised mine scheduling software, where it has carved an impressive international niche, and a mining consulting service provider.

After increasing revenue by 49% to $A26 million in the 12 months to June 30, 2006, and posting a 61% higher pre-tax profit of $6.1 million for the period, the Queensland-based company recorded further strong growth in the first half of 2006-07.

Its $17 million of revenue for the period was 11% ahead of budget, while interim pre-tax profit of $3.7 million was 34% up on the budget forecast.

With the freshly announced takeover of Sydney-based Minarco Asia Pacific and MineConsult, Runge's annual revenue may exceed $55 million next year.

The company now has about 230 staff and has extended its consulting presence into China and Indonesia.

Earlier acquisitions in South Africa and the US had extended its reach into Africa and the Americas, where it is also growing software sales.

AMP Capital Investors bought a 26% stake in Runge in September 2005, while founder Ian Runge (22%) and company staff own the balance. These respective stakes have been watered down to about 20% by the latest $20 million-plus share/cash acquisitions, with Runge staff owning the remaining 60%.

Runge chief executive Tony Kinnane said the company had arrived at its targeted $100 million enterprise valuation and was weighing up growth funding options, including an initial public offering, private equity deal or even some sort of amalgamation.

Others among Australia's fast-growing privately owned – and therefore largely hidden from public view – mining technology and service (MTS) firms say they are more reticent about public floats, despite the premium values currently being put on MTS companies by equity investors.

This is being accompanied by a growing understanding of the MTS sector in public markets and more attention from analysts.

But the rapid growth of the private MTS companies, particularly offshore growth, is straining traditional funding mechanisms.

The need to get bigger and find ways to service global mining clients in an increasingly borderless world market will increase the pressure and, as has been evidenced by Australian MTS business sales of recent years, company stakeholders and management will be left with two choices: sell up or find the funds to grow globally.

"You need to have a good profile in a number of markets," said Elizabeth Lewis-Gray, managing director of Victorian-based Gekko Systems, which has more than doubled its annual revenue since the 2004-05 year.

Typically, more than 70% of Gekko's revenue – projected at $25-30 million this year – is generated outside Australia.

"It seems that customers like to see you in (local) residence for a couple of years before they conclude that you are committed to the market," she said. "It is critical though in this global market where often the project is based in Africa/South America, the financier in Canada and the engineering company in Australia.

"We have had to focus on the medium-sized miners for fast technology adoption and growth. Generally the medium-sized miners have a greater focus on risk and reward as a trade off. Their projects are often less capital intensive and lower profile so can carry greater risk in the market.

"The big globals [miners] while more comfortable in supporting large suppliers that have similar communications and organisational principles are also focusing on supporting local supply and service of products used in their daily site operations and accordingly there is good opportunity for smaller, regional suppliers.

"In our case where we are an SME selling technically complex and niche applications – dealing with the big globals can be a very costly process.

"First you have to convince all levels of technical staff within the company – from site to head office – of your product benefits, which could be 40 people, and then when it gets to be signed off by the finance people, they want to ensure that you are a real company, and finally after all of that, the large globals will employ an engineer who will have a different cost, risk and experience viewpoint – they are just as likely to believe that using a new technology is too risky or too costly.

"However, as our business grows and matures and the market becomes more educated in our products and services, we expect our business with big globals to grow significantly."

MST is another company stepping up the pace of its international expansion, particularly in South America and Africa where it has just landed $600,000 of new deals to supply two mines in Peru and one in Tanzania, respectively.

The company has sold specialised communications technology and services to more than 350 mines in a dozen countries and has offices and representatives in 11 countries.

With Macquarie Bank coming onboard as a stakeholder in MST last year, the company is looking for the first time at offshore acquisitions to complement its organic growth, which has been impressive of late.

After 25% growth in revenue in 2005-06, the company is said to be on track to record a further 50% lift in 2006-07.

MST managing director Gary Zamel said he recognised the need for continued growth as big global miners looked to rationalise their supply chains and deal with reliable suppliers who would be around long term.

He believes his company must not only grow to outmanoeuvre and outlast rivals, but also "provide the solid platform global miners are looking for".

"Mining companies are certainly attempting to rationalise their supply chain and establish global partners in key technology areas," he said. "But the actual realisation of this is a slow process as the requirements of individual mining operations still needs to be taken into account.

"A willingness to invest in optimum technology at all levels in an organisation would provide a firmer platform for continued investment in improving the available technologies and developing the new ones."

Companies already enjoying healthy transaction flows with the big miners include Immersive, Micromine, Maptek and RCT.

Of these, Immersive is a standout in terms of its No. 1 position in a niche market, which has been built on exclusive technical exchange agreements with major mining equipment manufacturers on proprietary machine design information, and a growing acceptance in mining of the training benefits provided by simulation technology widely used in the military, aerospace and petroleum industries.

Its revenue from simulator sales climbed about 50% year-on-year to $17.3 million in 2005-06.

Immersive budgeted for $25 million of revenue in the current fiscal year but had booked that by the halfway mark, and it has already set its sights on $35-40 million next year.

CEO Peter Salfinger said simulators 100, 101 and 102 had recently been sold to a BHP Billiton operating unit.

Immersive has also supplied about 300 of its conversion kits, which transform simulators into different machine training modules.

Freeport McMoRan/Phelps Dodge, Rio Tinto, Anglo Coal, De Beers, BHP, Equinox Minerals and Caterpillar are among the major users of Immersive simulators and the company has offices outside Australia in South America, the USA and South Africa.

In October last year, Immersive management bought out a private equity firm, Equity Partners, which injected $5 million into the company in 2003, indicating the health of its finances and capacity to internally fund ongoing expansion in Australia and offshore. There are no acquisitions on the horizon.

The substantial growth forecast for next year in a market predicted to expand to $US500 million in the longer term is also a sign that a surge in interest in simulator training over the past two years – driven by skills shortages and factors such as the focus of mining companies on improving utilisation of expensive capital equipment – is set to translate into much higher order volumes.

RCT and Micromine are two Perth-based companies forecasting significant year-on-year growth in revenue on the back of broader mining industry adoption of certain technologies and operating methods, increased international sales, and the higher average unit value of transactions with clients.

In RCT's case, many large mining companies and contractors are chasing safety and productivity benefits from the application of tele-remote control technology in underground mines.

This trend is spreading from Australia and North America to other parts of the world. RCT has also supplied remote control technology for surface mining equipment such as bulldozers and drills, outside Australia, in South America, Africa, parts of Asia, and Europe.

"RCT has a vigorous export development agenda," said business development manager Phil Goode.

"We see African nations as more likely to provide growth in remote applications, mainly underground, as mines there are forced to improve operator safety and adopt mechanised mining methods to offset the shortage of skilled miners.

"South America may be a bit slower, mainly due to a different business culture, but many of the mines – both surface and underground – are relatively new, application of mechanised mining methods is common, workforces are well educated and management is very aware of international standards.

"Asia, including China and India, Russia and parts of Europe are developing markets experiencing significant changes to work practices."

At its current sales run rate, RCT's 2006-07 revenue could climb by more than 40% to about $A30 million. The company has more than 70 employees and projects in about 20 countries.

For Micromine, wider industry use of mine production management and reporting systems has seen orders for its PITRAM product rise strongly.

Coupled with its software sales to individual sites, big PITRAM applications in Australia, Africa and North America have taken the value of individual client transactions from less than $100,000 to as much as $4 million.

According to managing director Graeme Tuder, this has been a key driver behind 75% compound growth in revenue for the past three years, resulting in a quadrupling of the company's size over that period.

Tuder said Micromine had exceeded budgeted 2006-07 fiscal year turnover at the halfway mark of the year.

"I'm sure if we wanted to speed things up a bit further we could raise some capital without too much trouble," he said, but added that he didn't currently intend to divest equity.

"We've got no immediate plans to do other than what we're doing," he said.

"We've looked at one or two companies (potential acquisitions) and found the synergies weren't there in the end. If an acquisition opportunity came up and it looked good for everyone, we'd look for capital."

As well as the higher-value sales, Micromine has established and consolidated its presence in key emerging markets such as China and Russia, as well as traditional markets such as North America, South Africa and parts of Europe. Tuder said South America was his next target.

Micromine has released Chinese, Russian, Mongolian and Spanish versions of its software and IT products.

"We are giving companies the option of outsourcing their IT needs instead of building up an IT section of their own," Tuder said.

"Mining companies are getting more confident that this so-called boom is going to go for a lot longer yet.

"Instead of taking this and that product and then when the boom fades putting it in their mining IT graveyard and then starting again somewhere else, as has happened in the past, companies are thinking longer term and increasingly they are looking for suppliers who can go with them into the longer term."

*Richard Roberts is editor of www.highgrade.net