PORTFOLIO POINT: Queensland-based Mastermyne Group is well placed to take advantage of a forecast lift in coking coal production.
When market observers break down the so-called “two-speed Australian economy”, they often draw a line down the middle of the continent and talk of the resources-fuelled west coast economy flying, and the old industrial-based east coast economy floundering. While this is largely accurate, it fails to recognise a significant slice of the ongoing resources boom: Queensland coal.
Queensland government data shows 200 million-plus tonnes of coal was produced in the state in 2010, with the vast majority of this exported through its six port facilities dotted up and down the central Queensland coast. This level of production amounted to export sales of some $25 billion to customers in Japan, Korea, China and India. To put this into some context, total iron ore exports through Karratha and Port Hedland in the same period were just under $50 billion.
Make no mistake, Queensland coal is a big money-spinner and production volumes are growing rapidly. For every mine in production (currently approximately 50), Queensland government data suggests there is at least one other mine on the drawing board.
When it comes to the coal market, it’s important to understand that not all coal is created equal. Thermal coal, commonly used in power generation, is widely regarded as the poor cousin to top-of-the-value-chain metallurgical coal, which is used in iron and steel production and commands premium pricing accordingly (and with it healthier margins).
So how does a small cap industrial-focused fund manager go about getting exposure to increasing volumes of high-value metallurgical coal (also known as coking coal)? The investment team at OC Funds Management has identified Mastermyne Group (ASX:MYE) as a key player in the Queensland underground coking coal mining market. Indeed, I have been on board MYE since its debut on the ASX in May 2010 at $1.00. And even though the stock price is up almost 100% in just under two years, I have recently been adding to my position on the back of increased confidence in management and its ability to drive further growth in the business, particularly following its recent outstanding interim result.
Established in 1996, MYE provides specialised outsource services to the underground coal mining industry. MYE is essentially a one-stop shop for coal miners looking to outsource their mining operations, including project management and engineering, labour and equipment hire, installation of underground ventilation and materials handling systems, and maintenance/overhaul services.
Financially, MYE’s metrics tick many of the boxes I typically look for. These metrics include:
- Strong top-line growth (analysts are looking for 20% growth year on year);
- Healthy and sustainable EBIT margins (10% plus and expanding); and
- Sensible levels of net debt (gearing at around 30%).
Figure 1: Mastermyne Group (revenue, EBIT, margin)
Source: Analyst estimates
MYE’s client list reads like a “who’s who” of global mining giants and includes Anglo American, BHP Mitsubishi Alliance, Rio Tinto and Xstrata, among others. Its order book is strong with about 70% of its projected 2013 revenue locked in and any upcoming contract wins adding further to the upside. This order book and client list, coupled with 15 underground coal mines scheduled to come online in the next three years, means MYE is ideally positioned to take advantage of the step-change in coking coal production volumes.
With easing infrastructure constraints (various port and rail solutions are scheduled to come online in coming years), and further avenues for growth – including industry expansion, market share gains (such as moving into the NSW market) and targeted M&A – I believe MYE is well positioned to take advantage of the forecast growth in coking coal production. On an undemanding price-to-earnings ratio of around 8-times FY13 earnings and a 5% dividend yield, MYE offers excellent resource-sector exposure and leverage to the upside of the two-speed economy.
Robert Calnon is portfolio manager at OC Funds Management.