Metarock Group Ltd - Force Majeure at Crinum, Contract Terminated
Metarock Group Ltd
Force Majeure at Crinum, contract terminated
Metarock Group Ltd (ASX:MYE) has called Force Majeure on its Crinum contract with Sojitz Gregory Mining Pty Limited due to an inability to access the mine, resulting in the termination of the contract effective 21 October 2022. Crinum was forecast to contribute ~$100m revenue per annum at higher than group EBITDA margins until at least 2028, and as a result has resulted in another significant reduction in earnings guidance for FY23 (revenue down ~10% and EBITDA down ~30% at the mid-point). Continuing underperformance at PYBAR has also continued to impact trading. No guidance has been provided for FY24 but we have made significant changes on the back of Crinum’s termination. Such issues have resulted in a management change, with long-serving MD Tony Caruso resigning and being replaced by Paul Green, effective immediately. Mr Green has been CEO of Mastermyne for the past 2.5 years and has more than 25 years’ experience across the Australian coal mining industry. While disappointing, the share price arguably has been incorporating this news and revised guidance still implies attractive near-term multiples and potential share price upside. Applying peer FY22 EV/EBITDA multiples to MYE FY23 and FY24 revised earnings estimates implies a valuation of $0.62/share and $1.25/share respectively. Our DCF, as a sense check, is $1.00/share.
Business model
MYE provides a range of contracted services and equipment hire to major underground metallurgical coal operators (roadway development, conveyor installation, longwall relocation and maintenance, supply and installation of underground ventilation control devices) and metalliferous hard rock operators (mine development, raise boring, shotcreting, cable bolting and production drilling) via the acquisition of PYBAR. More recently, the group has sought to move into mine operations to operate mines in its own right for asset owners with limited underground experience. Such operations are longer- term in nature providing repeatable revenues at higher margins relative to contracting.
Key changes resulting from Crinum contract termination
Crinum was forecast to generate ~$100m revenue for six years at higher-than-average EBITDA margins and as a result is the key driver of our medium-term earnings revisions (see page 3). Offsetting this to a small degree will be the sale of excess equipment resulting in lower debt, depreciation and ongoing maintenance capex. Cook becomes the key mine operation site for MYE and our estimates are unchanged for this project.
Valuation between $0.62/share (FY23) to $1.25/share (FY24)
Our preferred valuation methodology for MYE is multiple-based given the number of long- listed mining services companies on the ASX. We apply FY22 peer adjusted EV/EBITDA multiples to MYE’s FY23 and FY24 earnings as they are more reflective of recent contracts at full production. The result implies a valuation of $0.62/share using FY23 estimates (down from $0.95) and $1.25/share using FY24 (down from $2.00). Our DCF as a reference is $1.00/share, down from $1.55/share.
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- Metarock Group Ltd - Force Majeure at Crinum, Contract Terminated19 Oct 2022