Friday, April 14, 2006

Brandrill overview on miningnews.net

Primer on my investment outlook

Here are some snippets of the Brandrill story :-

These days Brandrill is in fine fiscal fettle – it booked a $23.2 million profit for 2004-05 – and last year posted a world record for drilling depth, managing 1600m of 270mm holes in one shift at Ensham Coal in Queensland's Bowen Basin.

It also claimed, in a presentation to shareholders last year, to be Australia's largest specialist drill and blast contractor.

This drill and blast status was not always so for Brandrill. When it started out in the 1980s it was working in an underground mine in the Northern Territory.

By 1998 the company had, through organic growth and acquisition, built an underground business with revenues of $60-70 million a year, and drill and blast work bringing in $40-50 million a year.

Perry explained that while looking pretty spectacular on a balance sheet, this split of work was not the healthiest thing to have. "On the surface you would have 10-12 contracts while underground you had three to four contracts," he said.

The implication is clear. Lose one drill and blast contract and it hurts a little. Complete an underground contract and that is a major chunk of the balance sheet that needs to be replaced.

In 1998, Brandrill also stumbled across a piece of technology that would change its life. Called Sunburst, the US-developed technology used compressed air rather than explosives to break rocks.

The one drawback was that the mechanical device the US company used to deliver the compressed air was getting broken along with the rocks – a flaw that forced the US player into Chapter 11 bankruptcy.

Brandrill bought the technology and set about making it work, replacing the compressed air delivery system with a chemical propellant.

Instead of blasting the rock apart, as an explosive would, the propellant created a compressed gas that broke the rock along pre-existing cracks. As those cracks grew the gas expanded and its force dissipated, meaning the rock just broke rather than exploded.

The technology gave Brandrill a business opportunity in South Africa's deep underground mines. When blasting is being conducted, those mines lose eight hours of work time to allow the fumes to disperse.

In theory, Brandrill's technology – these days known as RockTek – would allow the mines to regain those hours because it did not generate the fumes and debris normally created by standard explosives. While RockTek was more expensive than conventional explosives, if it could increase the productivity hours at those mines it would be worth it.

With this idea in mind Brandrill headed to the dark continent and formed a joint venture with Torrex Contracting in South Africa. Besides its rock breaking technology, Brandrill also took some jumbos with it and, in something of a first, managed to make them work in South African conditions.

However, RockTek proved problematic. It was producing higher levels of carbon monoxide than mine regulations allowed. This meant the productivity benefits could not be achieved and the South African experiment was over. Brandrill still had its development business though.

Brandrill's bank, however, had started to get nervous and wanted the company to restructure its balance sheet. Costs, including the $1 million a month the company was spending on R&D for RockTek, were starting to bite.

Brandrill rig.

Perry was brought on board just in time to see things start to spiral out of control.

The company discovered one of its Queensland underground contracts was bleeding cash. It haemorrhaged about $5 million over 12-15 months. Then the South African mining industry hit a wall and Brandrill's business there went south. The company's underground contracts finished up and there was nothing to replace it. Remember, in 1998 these contracts accounted for 60% of Brandrill's revenue.

Perry brought in some new management staff, including a chief financial officer, and set about trying to staunch the company's cash bleeds but by early 2004 it was starting to become a losing battle.

With that in mind Brandrill's board called in Bentleys MRI Perth as administrators in June and the Commonwealth Bank appointed Ferrier Hodgson as receivers. Five months to the day later and the company was out of administration.

Part of that relatively rapid recovery was due to Mizuho buying the Commonwealth's $4.8 million debt and then putting at least $4.5 million into a new equity raising to get the drilling contractor relisted on the ASX on December 30, 2004.

With the company relisted, Perry said it had taken the decision to not re-enter the underground contract mining market and instead focus solely on drill and blast work. He said the company was aiming RockTek at the civil contracting market.

Another focus for the company is maintenance and training. After all, it is paid on the number of metres it drills so if the drillers are not achieving the right sort of penetration rates or rigs are out of action for longer than they should be, it costs.


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