With power costs for hard-rock miners typically representing about one-third of overall costs, and with fuel accounting for 80% of these power costs, PEA’s flexible dual-fuel and waste heat recovery technologies are coming to the fore.
Service providers to the mining industry are still looked on with suspicion by many investors – especially ones that do most of their business with gold miners – but the story that power supplier Pacific Energy Limited (PEA) has to tell is a good one, based on having the technological capability to meet the changes its customers are demanding.
PEA’s business is in delivering low-cost, tailored ‘off-grid’ power supply to the Australian resources sector, and ‘grid-connected’ renewable hydro-electric power. PEA owns and operates 19 power stations, with a total power generation capacity approaching 211MW, using either gas, diesel, dual-fuel or water to generate electricity, which is supplied to customers under long-term contracts.
At 46 cents a share, Pacific Energy is capitalised at $170 million. The core business division, Kalgoorlie Power Systems (KPS), has been delivering its resource sector clients, including some of the world’s biggest mining companies, ‘off-grid’ power supply solutions more than 25 years. KPS has three stations in the Northern Territory, with 37MW capacity, one station in South Australia, with 11MW capacity, and 15 stations in WA’s Goldfields region, with 172MW capacity. The two hydro power stations located in Victoria, have 6MW capacity, and have long-term power purchase agreements with electricity retailer EnergyAustralia.
Out to 2018, revenue is expected to remain dominated by gold mining – at 77%, with other 22% and nickel 1%. By client, the picture is reasonably well-diversified, with Anglogold accounting for 24% of revenue over that period, Regis Resources 17%, Sandfire Resources 13%, Newmont Mining 12%, Alacer Gold 10%, Millennium Minerals and St Barbara Mines both 6%, and the rest of the client book 7%.
Group contracted capacity is expected to rise by 11.1% in 2014 240MW, which would represent the first year of growth since 2012, when contracted capacity reached 250MW.
Despite the obvious challenges in the resources sector, PEA has some strong attributes in its favour, particularly its gas conversion technology. This is very much flavour of the month in the mining industry, as resources companies focus on lower-cost fuels to reduce mine production costs.
With power costs for hard-rock miners typically representing about one-third of overall costs, and with fuel accounting for 80% of these power costs, PEA’s flexible dual-fuel and waste heat recovery technologies are coming to the fore. PEA can convert existing diesel facilities to dual-fueled – a mix of 70% gas–30% diesel – with very little disruption.
In February, for example, Pacific Energy won a contract from AngloGold Ashanti to convert its 44 megawatt Tropicana Gold Mine power station from diesel to gas-fueled by 2016. Similarly, the company’s Carosue Dam power station – which serves Saracen Gold Mines’ Carosue Dam project – is to be converted from 100% diesel to an 11 MW dual-fueled operation, and the contract extended. At the moment, says PEA, this flexibility providing clients with lowest-cost fuel option available.
As well as the dual fuel conversion systems, Pacific Energy has developed, with a European partner, in a waste heat recovery system, that reduces power station fuel consumption and consequently, also emissions. This technology can achieve fuel savings of at least 7%: KPS and the mine client share the fuel saving and emission reduction benefits. The beauty of the waste heat recovery system is that earnings are boosted from the existing power station fleet. PEA has 24MW of waste heat recovery system work contracted to date and expects to lift this figure to 100MW over the next two to three years.
For the year to June 2014, PEA managed to post record earnings, on the back of a flurry of construction activity the year before. Earnings before interest, tax, depreciation and amortisation (EBITDA) rose 22% to $35 million, while net profit improved 12% to $15 million. The company paid a record fully franked dividend of 2.5 cents for the year, comprising a one-cent interim dividend and a 1.5-cent final payout.
Pacific Energy gave guidance for FY15 EBITDA to come in at $33 million–$35 million, and said it expected the 2.5-cent dividend to “be maintained in the foreseeable future.”
Then, for the December 2014 half-year, PEA reported revenue down 8%, to $23 million and EBITDA down 11% to $15.37 million, while net profit came in at $7 million, down 16 per cent on the previous corresponding period. The company maintained its interim fully franked dividend of one cent. The company revised its full-year EBITDA guidance $1 million lower, adjusting the range to between $32 million and $34 million dollars. PEA said KPS performed robustly in a subdued environment.
One thing that shareholders would not have liked seeing in December half-year was notification that managing director Adam Boyd was resigning. Boyd will be a tough act to follow, given that PEA’s market capitalisation increased almost 20-fold during his tenure. Boyd is remaining in the role until 31 March 2015, to allow time for a successor to be appointed and ensure a smooth leadership transition, but there has been no announcement of a replacement yet.
The investment case for PEA rests on the fact that while big new resources project announcements have tailed off, its projects are underpinned by exposure to the resources production phase, and mine life extensions. PEA’s customers are under pressure to adopt long-term cost-effective power solutions, meaning that its cost reduction technologies – gas displacement of diesel, and waste heat recovery systems – are highly sought-after.
Both technologies should boost the company’s future earnings. While brokers don’t see much in the way of earnings growth in FY15, FY16 is considered likely to show a big improvement. According to Thomson Reuters, analysts have a consensus target price on the stock of 61 cents, with a forecast fully franked dividend yield of 5.43% in FY15 and 6.52% in FY16 also contributing to return. On consensus forecasts, PEA is priced at an undemanding price/earnings (P/E) ratio of 12.1 times FY15 expected earnings, and 9.6 times FY16 expected earnings.