The only way is up for bottomed-out Boart

Given that it had foreshadowed its first half results a fortnight ago, the Boart Longyear result contained no real surprises, other than that it still has the support of its bankers.

Boart Longyear is one of the most dramatic examples of companies side-swiped by the reaction of the big miners to the downturn in commodity prices. It has been savaged.

Only two years ago it had revenue of $1 billion in the June half. Today it disclosed revenue of only $421 million. Two years ago it had half-yearly earnings of almost $98m. Today’s interim result was a loss of $142.8m. More than 60 per cent of its drilling rigs remain idle.

Yet only a few days ago, its lenders eased covenants and lifted the headroom on debt to give the company more flexibility as it conducts a strategic review.

The reason the lenders are being patient is, perhaps, that they have little choice. With the world awash with unutilised rigs, there is no market for them. And, with Boart Longyear’s share price around 18 cents (versus more than $4 two years ago), there isn’t any easy way to raise new capital.

More particularly, there is a recognition that the group has, in the longer term a very good business. But as chief executive Richard O’Brien said today, it has been overloaded with too much debt. Net debt stands at $556m.

O’Brien, a former chief executive of Newmont, is another reason the banks have been supportive. He and his team have reduced the group’s costs by almost 40 per cent in two years while shifting the mix of costs from fixed towards a greater proportion of variable costs. Moreover, O’Brien has been completely realistic and candid about the group’s predicament.

The banks would understand that the current management is far better placed than them to try to trade Boart Longyear through the most depressed part of the resource sector cycle.

O’Brien himself is cautiously optimistic about the outlook, with signs that the sector’s downturn may have flattened out.

With Boart Longyear particularly exposed to a gold sector, which tends to have a shorter reserves life than other commodities -- more than 40 per cent of its revenue comes out of the sector -- he is hopeful that the companies will have to begin replenishing reserves soon, lifting demand for his group’s services.

O’Brien and his team are in the midst of a strategic review. They concede that they need a positive outcome from that review by June next year if the company is to survive without further concessions from its lenders or an unlikely hockey-stick like recovery in resource sector activity and demand for its services.

Boart Longyear has been investigating recapitalisation options, including new equity, refinancing the debt, undertaking a debt for equity swap and selling all or part of the business. It has seen some distressed debt specialists’ buying of its debt and there have been some strategic movements on its share register.

It said today that there had been some interest from investors with significant access to capital.

If O’Brien is right and the 125-year-old Boart Longyear is approaching (or perhaps even reached) the bottom of the market for its services, there is potentially considerable upside for any investor at today’s distressed levels for both its equity and its debt.

It is, after all, the world’s leading supplier of drilling services and equipment to the mining industry. With its significantly lower fixed cost base, it is very leveraged to even a modest pick-up in activity levels, with the potential to be relatively more profitable in future than it has been in the past because of the restructuring of the cost base.