Boart Longyear BLY
September 06, 2012 - 5:08am EST by
hkup881
2012 2013
Price: 1.27 EPS $0.35 $0.00
Shares Out. (in M): 461 P/E 4.0x 0.0x
Market Cap (in $M): 585 P/FCF 4.0x 0.0x
Net Debt (in $M): 374 EBIT 250 0
TEV ($): 959 TEV/EBIT 3.8x 0.0x

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  • Driller
  • Discount to Tangible Book
  • Australia
  • Insider Buying
  • Dividend yield
 

Description

I have to apologize in advance, but this is a somewhat short writeup as I wanted to get the information out there while the shares are grossly oversold. I think I have covered many of the key macro points in the past on my Energold (EGD CN) writeup and that writeup was updated a year ago by AAOI. Incidentally, Energold is also quite oversold for similar reasons. 
 
We all know that the stock market swings wildly between manic periods of fear and greed. Nowhere are these swings more severe than in economically sensitive companies. Normally, these swings make sense. Every once in a while, I just shake my head and say “wow, fear sure is one strange emotion.”

Anyone following the speculative junior mining space has known that juniors cannot raise capital lately. Naturally, this means that they are cutting back on exploration spending. One would expect this to impact the short-term earnings of companies doing exploration work; however the long-term business fundamentals are unchanged. The world is mining more stuff than it is discovering, and exploration needs to increase just for producers to keep pace with depletion. The bludgeoning that these companies have experienced in the past month is just stunning. One only needs to look at the chart of Boart Longyear (BLY: Australia) the largest hard rock drilling company in the world.

On May 1, the stock closed at 4.19. Yesterday it closed at 1.27. The reason for the decline? Fear. Guys are scared of 2009 repeating. In 2009, Boart saw a dramatic slowdown in demand for drilling and to avert a possible bankruptcy, they did a very dilutive equity offering near the lows. Today, the stock is at a dollar, in 2007, it was over twenty dollars. Dilutive offerings are painful and they leave a very scared shareholder base.

Let’s look at Boart today. Tangible book is $1.65 a share. They earned 21 cents a share in the first half and are looking to pay a 6.4 cents half year dividend (Aussies report earnings on the half year). In 2011, the company reported 35 cents a share of income and paid a11.4 cent dividend for the year. The company is flush with cash, debt is manageable and as business slows, receivables will be collected and converted into cash. It’s not like business is falling off a cliff or anything either. While the company lowered guidance for the second half, they’re expecting things to be only down a bit from the first half. I’m not going to tell you that I know how to value a company like this or that I have any better visibility than management as to 2h/2012 or FY 2013 earnings, but Boart is trading at a 9% yield on last year’s dividend, four times last year’s earnings and about a similar multiple on this year’s earnings seems kind of silly to me. Insiders also seem to agree with me. Four of them bought shares in the past week.

Is Boart a great long term investment? Energold is the better business, but I look at the price and cannot help but buy a few Boart, in the hope of seeing a nice bounce. I really cannot remember seeing a sector get washed out like this on very little in the way of negative news. Sure, the juniors aren’t doing much, but the producers are coining money and making up for years of underinvestment in existing assets. Overall, I do not expect to see a significant drop in worldwide drilling demand. There is a lot of drilling to do, and someone has to do it. The earnings might shrink in the short term, but long term, this is a solid businesses with long term demand and minimal risk of a serious debt issue. I’m stumped at why investors have dumped the shares like they have.

I treat this position like a trade and have bought in the past 2 days with the view of looking for a multi-week/month bounce as investors become less scared of the magnitude of the decline in drilling demand. It also helps that you get to collect a bit of a dividend if you buy immediately (record day is September 10).

I can answer much more on the idea in the questions section.

 

Catalyst

Selling abates. People grow less concerned about the world ending. 
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    Description

    I have to apologize in advance, but this is a somewhat short writeup as I wanted to get the information out there while the shares are grossly oversold. I think I have covered many of the key macro points in the past on my Energold (EGD CN) writeup and that writeup was updated a year ago by AAOI. Incidentally, Energold is also quite oversold for similar reasons. 
     
    We all know that the stock market swings wildly between manic periods of fear and greed. Nowhere are these swings more severe than in economically sensitive companies. Normally, these swings make sense. Every once in a while, I just shake my head and say “wow, fear sure is one strange emotion.”

    Anyone following the speculative junior mining space has known that juniors cannot raise capital lately. Naturally, this means that they are cutting back on exploration spending. One would expect this to impact the short-term earnings of companies doing exploration work; however the long-term business fundamentals are unchanged. The world is mining more stuff than it is discovering, and exploration needs to increase just for producers to keep pace with depletion. The bludgeoning that these companies have experienced in the past month is just stunning. One only needs to look at the chart of Boart Longyear (BLY: Australia) the largest hard rock drilling company in the world.

    On May 1, the stock closed at 4.19. Yesterday it closed at 1.27. The reason for the decline? Fear. Guys are scared of 2009 repeating. In 2009, Boart saw a dramatic slowdown in demand for drilling and to avert a possible bankruptcy, they did a very dilutive equity offering near the lows. Today, the stock is at a dollar, in 2007, it was over twenty dollars. Dilutive offerings are painful and they leave a very scared shareholder base.

    Let’s look at Boart today. Tangible book is $1.65 a share. They earned 21 cents a share in the first half and are looking to pay a 6.4 cents half year dividend (Aussies report earnings on the half year). In 2011, the company reported 35 cents a share of income and paid a11.4 cent dividend for the year. The company is flush with cash, debt is manageable and as business slows, receivables will be collected and converted into cash. It’s not like business is falling off a cliff or anything either. While the company lowered guidance for the second half, they’re expecting things to be only down a bit from the first half. I’m not going to tell you that I know how to value a company like this or that I have any better visibility than management as to 2h/2012 or FY 2013 earnings, but Boart is trading at a 9% yield on last year’s dividend, four times last year’s earnings and about a similar multiple on this year’s earnings seems kind of silly to me. Insiders also seem to agree with me. Four of them bought shares in the past week.

    Is Boart a great long term investment? Energold is the better business, but I look at the price and cannot help but buy a few Boart, in the hope of seeing a nice bounce. I really cannot remember seeing a sector get washed out like this on very little in the way of negative news. Sure, the juniors aren’t doing much, but the producers are coining money and making up for years of underinvestment in existing assets. Overall, I do not expect to see a significant drop in worldwide drilling demand. There is a lot of drilling to do, and someone has to do it. The earnings might shrink in the short term, but long term, this is a solid businesses with long term demand and minimal risk of a serious debt issue. I’m stumped at why investors have dumped the shares like they have.

    I treat this position like a trade and have bought in the past 2 days with the view of looking for a multi-week/month bounce as investors become less scared of the magnitude of the decline in drilling demand. It also helps that you get to collect a bit of a dividend if you buy immediately (record day is September 10).

    I can answer much more on the idea in the questions section.

     

    Catalyst

    Selling abates. People grow less concerned about the world ending. 

    Messages


    Subjectquestions
    Entry09/06/2012 09:10 AM
    Memberlordbeaverbrook
    thanks for the idea.  would you have any sense of how much of the business is being used as "swing" capacity?  also, you noted that the tangible book is $1.65 per share; do you have a sense of what is understated (or overstated) on the b/s... any hidden assets?

    SubjectRE: business model
    Entry09/07/2012 08:02 AM
    Memberhkup881
    Barana901- Contracts are very variable. The large stable ones say things like "drill us 50,000 meters a year for the next 20 years and if you don't screw it up, at year end we'll backwards engineer the thing so you get cost + $50 a meter" little contracts say things like "go to this war zone, do 2 holes, see if it's interesting, try not to die, and we'll pay you $1m if you can bring the drill core back." I've heard of some really whacky contracts over the years....
     
    For Margins, the little contracts can be up to 95% margin. They seem to average out at 30-45% depending on where in the cycle you are and the size of the contracts and where you are doing busienss. remember that BLY does mostly the very boring, low margin, plain vanilla drilling for majors and mid-tier producers as opposed to the more speculative work for juniors, this is why their business is actually pretty stable.
     
    Working capital cycle usually leads to sizable recievables mostly to large mining companies. as business contracts, these recievables will turn to cash, which will make the net debt look much more favorable. Think of a bunch of the debt as offsetting receivables

    SubjectTime to Exit
    Entry09/25/2012 11:15 AM
    Memberhkup881
    Big bounce and also a nice dividend along the way. Feels like it's time to get out.
     
    There is no real hurry, but the easy money is made.

    SubjectRE: Great call...
    Entry10/13/2012 07:10 PM
    Memberhkup881
    Thanks
     
     

    SubjectManagement and covenants
    Entry06/07/2013 01:34 PM
    Memberafgtt2008
    Hi Kup, thanks for the write up. I'm not sure if you still follow the story but it seems that the conventional drilling market is getting weaker by the day. That being said I like what the new CEO has been saying about cutting costs, focusing on making the rigs they are running as productive as possible and making sure that the balance sheet doesn't get out of hand. Do you have any experience with him? Any thoughts on his strategy? The gross debt to EBITDA covenant could be breached under a more dire scenario. Any thoughts on the options that are available to him if he goes through it?

    SubjectRE: Bombs Away
    Entry08/27/2013 04:06 PM
    Memberafgtt2008
    Any idea why write's offerings are much more common in Austrailia than North America? I have been watching this story and am scared off by the potential raise. I am not sure how open the HY debt markets will be or how onerous the interest rate will be considering the negative sentiment in the industry. I agree with you that at a +10% ytm, things look much more interesting.
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