Boart Longyear chief executive Richard O’Brien. Photo: Josh Robenstone
Richard O’Brien, the man who once headed up gold juggernaut Newmont and who now spearheads the Boart Longyear recovery, must think running the world’s biggest gold company was a walk in the park compared with this drilling services business.
Last year may have been Boart’s annus horribilis, as Business Day wrote back in September, but O’Brien and his team are by no means out of the woods yet.
The release of Boart’s 2013 earnings this morning paints a sombre picture.
Earnings as measured in EBITDA have all but evaporated, coming in at $107 million.
The split between both the halves is of more concern however: $80 million for the half to June 30 and a paltry $27 million for the six months to December 31.
This is a business that, while highly leveraged to any upturn in the mining sector, particularly exploration, may not be around in its present form by the time the cycle turns.
Its debt load remains far too high.
Management is vying, hand over fist, to continue its cost cutting program but underlying market conditions are yet to stabilise.
A few basics: Boart is carrying about $US600 million in gross debt, its annualised EBITDA run-rate applying the most recent half year is $US54 million.
The group has annualised cash interest commitments of $US52 million and its normalised capex requirements – just to maintain the drill rig fleet alone – run between $US50 million and $US75 million.
Net debt has not blown out in the past six months as Boart has undergone an aggressive working capital release.
But the problem is that working capital can only be released once. Implemented cost reductions appear to be helping offset pricing declines in the high single digits.
Current drill rig capacity utilisation is running at roughly 30 per cent (it was 45 per cent in the June quarter) and as pricing pressure is only really starting to bite now Boart is in a fight for its life.
It has announced yet another deal on its key debt covenants relating – the third such renegotiation in the space of six months.
Bear in mind, this is a company that back in 2009 trebled its shares on issue via a deeply discounted jumbo re-capitalisation.
So it has form when it comes to putting the hat around.
It was only back in October last year that the board said there was no current intention to raise fresh equity to address its highly geared capital structure. It was effectively rolling the dice, punting on the prospect of a turnaround in market sentiment.
Now all options are on the table – including asset sales and equity raisings – in order to bring leverage down to a more sustainable level.
Regards an equity raising the question now is would traditional institutional equity investors be prepared to even consider a re-capitalisation given current fundamentals, the uncertain sector outlook and Boart’s small-cap equity value.
Meanwhile, the question is: is there enough free cash flow to service interest payments if things don’t pick up? The holders of that $US600 million in debt might be looking for a pre-emptive exit – or at least to offset some risk.
With the announcement this morning of the appointment of Goldman Sachs to undertake a review of Boart’s capital structure it appears that the writing may be on the wall for equity holders.
This one is only for the most hirsute of chest only.
Michael West established Michael West Media in 2016 to focus on journalism of high public interest, particularly the rising power of corporations over democracy. West was formerly a journalist and editor with Fairfax newspapers, a columnist for News Corp and even, once, a stockbroker.