Ausdrill Ltd. Ratings Raised To #BB-# On New Contracts And Equity Outlook Stable

Stocks and Financial Services Press Releases Wednesday October 11, 2017 17:23
MELBOURNE--11 Oct--S&P Global Ratings

MELBOURNE (S&P Global Ratings) Oct. 11, 2017--S&P Global Ratings said today that it had raised the issuer credit rating on Australian mining services company Ausdrill Ltd. to 'BB-' from 'B+'. The outlook is stable.

We also raised the ratings on Ausdrill Finance Pty Ltd.'s US$300 million, senior unsecured, and subordinated notes by one notch to 'BB-' from 'B+', with the recovery rating remaining at '4'. In addition, we raised our issue ratings on Ausdrill Finance Pty Ltd. and Ausdrill International Pty Ltd.'s A$200 million, secured, syndicated bank loan by one notch to 'BB+' from 'BB', with the recovery rating remaining at '1'.

We raised the ratings to reflect our expectation that Ausdrill's new contracts, management of costs, and increasing earnings will provide an enduring benefit to the company's credit metrics. In addition, Ausdrill recently raised A$100 million equity (before costs) to fund its growth capital expenditure for new contracts.

We forecast that Ausdrill's funds from operations (FFO) to debt is likely to be greater than 30% in the year ending June 30, 2018, and comfortably above 30% in fiscal 2019, after new projects in African contract mining services fully ramp up.

Our expectation of a modest recovery in trading conditions for the Australian mining services industry would support Ausdrill's business prospects. The recent rebound in commodity prices has increased the number of prospective projects for mining services companies.

However, the recovery in contract rates may be modest and slow as miners remain disciplined in containing operating costs. Miners are still cautious in expanding supply and committing significant capital expenditure to large greenfield projects. Therefore, operating efficiency will be key to improving the profit margins of mining services companies. In our view, Ausdrill's restructuring initiatives will improve the efficiency of its operations, and hence, its margins.

Ausdrill's exposure to the gold mining sector has somewhat shielded the company from reducing demand for work in other sectors like iron ore, coal or base metals. This is because gold prices have held up well compared with other commodities in 2015 and 2016. In 2017, about 78% of Ausdrill's revenue was derived from gold or copper.

That said, in our view, gold is also inherently volatile and maintains an inverse correlation with U.S. interest-rate expectations. The interest rate hike by the Federal Reserve and the continued relative strength of the U.S. dollar could affect gold prices over the next several years. However, we believe that any deterioration in gold prices from an improving global GDP would offer business opportunities in base metals where Ausdrill also has expertise. In addition, favorable currency movements have aided the competitiveness of the Australian and African mines that Ausdrill services.

Ausdrill's growing exposure to Africa is a limiting rating factor, due to our view of higher sovereign and operational risks in Africa, compared with developed countries like Australia. Based on its sales for 2017, Ausdrill's exposure to Africa was about 53%, with Ghana (B-/Positive/B) comprising about 30% of the group's total revenues. The company's newly secured contracts (totaling about US$125 million of annual revenue) are mostly in Africa.

Nonetheless, we consider the company has a long and successful track record in operating on the African continent and manages these risks adequately. However, we do view these jurisdictions as being inherently riskier to operate in when compared with the company's Australian operations.

The stable outlook reflects our expectation that Ausdrill will continue to grow its order book and successfully execute its new contracts in Africa. We expect the company to maintain sufficient liquidity, which will provide the company with a buffer to withstand any moderate weakening in industry conditions or missteps in new projects.

We expect the company's FFO to debt to be materially higher than 30% and for the company to generate positive free operating cash flows when new projects reach steady-state in 2019, following the current stage of heavy capital expenditure.

A downgrade could occur if Ausdrill is unlikely to comfortably sustain FFO to debt of 30% and if free cash flows remain negative by 2019. This scenario could occur if: The improved trading conditions in the mining services industry are not sustained. For example, if gold prices were to fall significantly pressuring the competiveness of the mines that Ausdrill services with no work from other base metals or bulk commodities to offset the impact;Execution issues occurred at Ausdrill's newly secured projects that reduced the company's margin for a prolonged period.

An upgrade is less likely due to Ausdrill's growing exposure to Africa and relatively small scale. However, in the longer term, we could consider an upgrade if Ausdrill materially improves its scale, commodity diversity, and geographic mix, while maintaining its conservative financial management.


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