Metal move

ENGINEERING group Sedgman has capitalised on the coal mining boom in Queensland and has grown exponentially over the past 20 years by reading the industry trend of greater outsourcing and servicing. Now entering a new phase, the company is making a move into the metal-mining world.
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Scorpion Cable Handler being manufactured at Advanced Chain Technologies' UK factory.

Staff Reporter

Published in the January 2006 Australia’s Mining Monthly

The Brisbane-based company was established in 1979 and has developed into a leading provider of multi-disciplinary engineering, project delivery and operations services to the local coal industry.

After raising $40 million through a $1-per-share initial public offer of 26% of the company, Sedgman shares traded as high as $1.45 on its debut in June.

On the strength of the $65 million acquisition of the Pac-Rim Group, the shares gained almost 35% in November, capitalising the Brisbane-based company at $282 million. The firm reported a $13.1 million net profit last year, $600,000 above prospectus forecasts and more than double 2005’s result of $5.2 million.

Specialising in the design, construction and operation of coal-handling and preparation plants (CHPPs), the company has also gained an international reputation for its coal-processing and materials-handling technologies. It has developed an integrated structure to provide CHPP services from its two primary business units of engineering services and operations.

Much of it came from key work on the Dawson upgrade for Anglo Coal, Rio Tinto’s Hall Creek expansion, and the Wilpinjong project for Excel Coal. Stockbroking group Ord Minnett forecasts that net profit will hit $19 million in the 2006-07 financial year and $32.9 million by 2009.

According to Sedgman chief executive Peter Hay, the company has also capitalised on the opportunity to service the growing number of smaller mining operations that have sprung up around the country as a result of more favorable commodity prices, especially in the precious and base metals sectors. “By 2010 there is $30 billion of work to occur in the metalliferous sector. That’s pretty exciting for where we’re currently positioned,” he said.

The scenario looks good for the coal industry as well, with another $1.2 billion in new capital expected to be injected there.

Sedgman, which identified strategic acquisitions as a major growth opportunity in its prospectus, now plans to significantly upgrade the engineering and project services of the Pac-Rim Group, while leveraging off Sedgman’s engineering capabilities. The two companies seem to be a natural fit, with similar histories. The acquisition was greeted with accolades by market pundits and sent Sedgman’s share price soaring.

Pac-Rim provides ore-crushing and screening services to a range of metals mine operators throughout Australia, with clients including BHP Billiton and Xstrata. Based in Townsville, Queensland the company has 124 staff and projected revenue of about $36 million for the 2007 financial year. Like Sedgman, Pac-Rim has more than 20 years experience in the mining industry and its two biggest contracts are with Xstrata’s Blackstar and George Fisher zinc/lead mines at Mt Isa.

Ord Minnett senior research analyst John Lawlor praised the Pac-Rim deal as “an excellent move” that provided good diversification, added exposure to more stable earnings and gave investors a positive earnings-per-share result. “It’s a no-brainer, a very good deal. The real strategic value is that it will enable Sedgman to roll out its model to other parts of the resources sector. There’s incredible potential for growth in that business.”

Hay has the statistics to back up the acquisition and sees leverage to a great cross-section of the mining sector as driving growth for the company in the future.

“Sedgman is recognised as the industry leader in the design, construction, operation and maintenance of coal-handling and preparation plants in Australia,” Hay said. “Pac-Rim is an established operator in the metalliferous industry, making it a great fit. While Sedgman will remain focused on coal, the Pac-Rim acquisition opens the door for further growth so that we can service the entire commodities industry, including processors of iron ore, gold, copper, nickel, silver, lead and zinc.”

A record $25 billion is being ploughed into mining and metal-processing projects across the country. Between 2006 and 2010, total ore processed is expected to increase from 663 million tonnes to 865Mt, a compound annual growth rate of 6.8% per annum.

Current production for mid-tier mine owners, who exhibit an increasing shift towards outsourcing, is expected to grow from 180Mt in 2006 to 265Mt in 2010.

Pac-Rim is also attractive because all its business comes from the running of crushing operations, rather than simply providing services. That means its contracts are for the long term and offer higher returns. There are also opportunities to use Sedgman’s engineering skills base to extend Pac-Rim’s business down the engineering service chain beyond crushing and screening and into processing and grinding.

Sedgman is now an operator at one location only — Blair Athol in Queensland. Hay is keen to grow that side of business and, after the Pac-Rim acquisition, operations will account for 37% of the company’s earnings before interest and tax, up from 17%.

Hay said Sedgman was also ready to use its more sophisticated approach to risk management to service those smaller mining companies with single operations that would have been too risky for Pac-Rim to handle on its own. “We have a different philosophy and capacity to take that risk and analyse that risk, and we believe that is part of the market that is available to us,” he said.

Despite the skills shortage gripping the country at the moment, Sedgman claims that its labour retention policies are working, with a 14% staff turnover rate compared with what Hay said was a 20% average in the sector. The floating of the company provided Sedgman with an extra avenue for rewarding staff through the offering of shares, he said.

In another strategy to alleviate the local skills shortage, Sedgman has been scouting for skilled engineers in Chile, which has a long history of world-class mining education.

By Lou Caruana

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