Quick Easter summary as follows. A lot of this from memory as too busy chasing chocolate-laden kids around to double-check dates etc but I am sure others can point out any inconsistencies. Obviously this is my view of the world only.
Early Years Listed Swick is approx 10 years old as a listed company. I have been in and out for most of this time. Currently in.
They expanded quickly in the late 2000's and quickly grew market share in underground core drilling (for grade control mainly) off the back of a first mover advantage in underground mobile drills. The also entered surface diamond drilling, surface RC drilling and underground production drilling segments.
They also commenced a push into international markets around the same time, entering Canada, USA, Portugal, plus having a go at Indonesia in 2013. Along with this growth came a bunch of debt.
They sold off surface diamond drilling segment with perfect timing, just before the main resources slump. This helped with the debt issue somewhat.
Downturn As their share price dropped (along with the wider mining/mining services market) from early 2010's onwards they initially bought back shares for a year or so as well as paying down debt. They stopped the share buyback as the resource slump dragged on. Mid-2010's they exited their underground production segment as the contract came up, plus have pulled back from almost all overseas work and focused more and more on their Australian underground segment.
I have spoken to the company a couple of times about their overseas work. Their business development (in my opinion) was pretty poor and they won contracts / trials in mines that did not suit their underground rigs (poor access, poor underground tunnels) or had issues with local USA unions / protectionism which placed undue pressure on the contracts and made them unviable (e.g. being banned from using drilling mud/fluid, whereas the previous incumbent could use muds freely).
Down Well vs Done Poorly What they have done successfully during the extended downturn is retained market share and a number of large contracts to keep the cashflow going. They have continued to invest in their rigs, processes, health & safety, positioning for the eventual upswing.
What they have not done so well is remained profitable and have slowly grown their debt balance again. They 'bought' some sizably contracts at discounted rates to keep the cash coming in... but this hasn't made them any money. Kent Swick has recently commented that if he had his time again he wouldn't have taken some (unprofitable?) contracts - but they did what they needed to do and stayed afloat when many others sunk.
The company has focused on growing organically, rather than by acquisition, in their core market segment. This both has pros and cons, as discussed below.
SWK vs MSV Compare to Mitchell Services - they grew as well during the last 2000's and sold out at/near the peak to AJ Lucas for circa $150m. Mitchell timed the sale well, AJ Lucas not so much.
Mitchell Services have then restarted their business effectively, using shareholder loans to purchase distressed assets (rigs) during the extended downturn - holding them and now putting them to work as the market swings up again.
Swick have commented a couple of time they have assessed many acquisition opportunities over the years, but due to their specialised focus would have to either scrap or substantially rebuild the acquired rigs which makes the acquisition uneconomic (as they viewed it).
They are playing in the same space, but different business models. Swick is very focused on being a 'best in class' company in their target markets and growing organically. Mitchell is more riding the business/mining cycle and growing through smart acquisitions.
Swick is not really growing at the moment in revenue terms, although the 'quality' of their contracts is steadily improving and with it profitability and a return to form. They are shifting rigs from old contracts to new more profitable contracts, vs building new rigs willy-nilly (as they used to do).
Mitchell is already in growth mode - reflected in the multipliers/EV. They have also started to eat into some of the contracts previously operated by Swick. I would assume they have surplus rigs which can be deployed, plus are happy to offer lower rates to grow market share.
Current Swick Outlook It's been a bumpy road and continues to be in the short term. Swick has not quite tapped out the local Australian market, but have mentioned a number of times they are around 40% market share for underground drilling (I would guess less right at this moment) against a maximum 60% of the market which would suit their drills.
Growth for Swick is overseas. They have fumbled many opportunities in the past, but now seem to have some decent traction being able to hold their Neves-Corvo (Portugal) contract for a number (5?+) years and growing in Nevada. The overseas work is more profitable than local contracts, due to 'fixed shift' pricing (especially in Nevada) vs $/m pricing and lower labour costs vs Australia.
In general, they are moving swiftly in the right direction and share price is woefully undervalued. HOWEVER - it has been that way for probably the last 5 years... so who can tell when things will change?
Orexplore Has massive potential but is early days really. Will need another year or two to get a gold scanning machine commercialised and then accredited to replace normal assays, this is the tipping point. The margins on Orexplore are many times greater than drilling, just need to get some revenue going. Company has stated that out of every $100 of drilling revenue, $90 is cost. Compared to $100 of scanning revenue, where <$10 is cost.
Wider Market Outlook With mineral reserves continuing to decrease and companies (e.g. NST, BHP etc) focusing on optimising their underground mining I see a nice rosy outlook for drilling in years ahead. Main risk to both SWK and MSV is to balance contract pricing with even-increasing costs and keep their businesses profitable.
Hope this helps. Haha probably not. I really like the company and continue to buy as funds allow, mainly off the back of the prudent management approach and simplicity of the business model. They know who they are now and are focused on excelling in their target segments. However, if/when that actually pays off who knows.
SWK Price at posting:
20.5¢ Sentiment: Buy Disclosure: Held
