Sedgman finds its niche

Sticking to its core area of expertise has paid a handsome dividend for this Aussie engineering company

Staff Reporter

The decision to specialise in coal and not diversify into other resources has paid dividends for Brisbane-based engineering company Sedgman. The company today is one of the major engineering providers in the specialised niche area of coal preparation and mine surface infrastructure.

Over the last ten years Sedgman has established a significant international presence with growth anchored in the United States, Indonesia and Colombia. Roughly half of the company's annual turnover of $80 million is now derived from its US operations.

In the US, projects are primarily of a turnkey design and construct nature, with a relatively small proportion of the turnover in pure design, engineering or project management. Australia, on the other hand, has a much higher proportion of its business in engineering, procurement, construction and management (EPCM) style projects.

Sedgman's executive chairman, Russell Kempnich, believes this difference arises from the differences in the deployment of capital. The Australian coal industry has grown on the back of strong export sales and has historically taken a much longer view of capital return. However, the US industry is driven by a very cost competitive domestic market and will take a very short-term view in recovery of capital investment.

"When you're in the seaborne traded market, the highest value-added market in the world, you apply your capital in a different way to [the way you would] in a domestic market. The industry in Australia has grown up being engineered for the long-term. The US market is driven by the domestic market where there is more susceptibility to competition and to mines opening and closing," Kempnich said.

While coal preparation and "the black box of the wash-plant" was Sedgman's area of historic expertise and core intellectual property, the expansion into surface infrastructure and contract operations have become an area of important growth and expansion.

"We now offer a full engineering, design, construction and operations service for the coal industry, from dump station to load-out," Kempnich said. "A good example is Shell's Moranbah North project where Sedgman engineered the total surface facilities."

At Peabody's 8 million tonne per annum Bengalla mine in central New South Wales, Sedgman engineered the project, procured raw materials and managed the construction on an EPCM basis.

Kempnich predicts that the approach where the mining company engineers and manages its own projects and even EPCM style contracts is a thing of the past in Australia.

"The industry will move more towards direct hard money contracts, which is the case in the US. There, Sedgman is predominantly a construction company with turnkey responsibility and less focus on engineering," he said. In this environment the coal company is able to streamline its own management team and eliminate the duplication of tasks and responsibilities.

In recent years, the company has taken on more contracts that are structured similarly to US contracts, with Sedgman taking turnkey responsibility for entire projects. Australian Premium Coal's Coppabella mine in central Queensland was engineered, designed and constructed by Sedgman under a hard money contract.

Kempnich is eager to point out, however, that the two modes of operating are not easily transplantable from country to country.

"A company like Sedgman could not take their Australian way of doing business and transplant it into the US and vice versa. Now that we are working with more international coal companies, there is a cross fertilisation between the two markets. We are able to take the strengths from both markets and both approaches. At the same time we need to understand the underlying economics and commercial factors at work in the US market and the long-term view of Australian producers," he said.

Unlike other engineering and contracting companies, Sedgman does not take equity in coal mines - "we do not want to become competitors to the market we're supplying," said Kempnich - preferring rather to invest in build, own, operate, transfer projects. A typical arrangement may see Sedgman finance and operate a coal preparation plant for 3-5 years during which time the capital investment is amortised. Ownership then transfers to the coal mine owner.

For Kempnich, the mature Australian and US coal markets will continue to see growth and will be important markets for Sedgman. In Australia, one area of potential growth is in the strategic application of capital. Getting the most out of existing plants, for example, is an area that Sedgman is increasingly developing locally. The company is also pursuing work in developing markets such as India and Indonesia, where several projects are nearing finalisation. "Blue-sky" markets are Latin America, particularly Colombia and Venezuela, which are expected to become major players into the European market over the next 3-5 years.

China is also potentially an important developing market for Sedgman, but Kempnich said the Chinese are only just beginning to understand that it is important for them to get good quality, reliable equipment from international suppliers in order to be competitive.

"Our strategy for China is to find the appropriate joint venture partner to protect our intellectual property and to have a long-term business there," he said.

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