Suppliers where the action is

FORGET the gold explorers and miners. The $US70 increase in gold prices since March 2001, to nearly $330, provides some healthy prospects for suppliers of mining services and equipment.

While explorers may provide high risk for possibly no reward, DJ Carmichael analyst Peter Strachan believes investors should consider placing their money with suppliers.

“The only sure way to make money in this market is to back suppliers of mining and exploration services and equipment,” he said in his weekly brief.

Mr Strachan said that, thus far, action in the gold arena had been played out at the corporate end by South African and US-based companies “sweeping away cheap local producers one by one”.

“Little new exploration money has entered the market, with the result that new gold discoveries have been few and far between,” Mr Strachan said.

“This situation has begun to change in a big way, with a long list of rock kickers lining up to try their luck.”

Consultant engineers such as Clough and Downer Group and construction and maintenance services companies such as Monadelphous, United Group and RCR Tomlinson are all likely to see increased levels of activity arising from sustained strength in the gold mining and exploration sector, he said.

Explosives companies such as Orica also are expected to experience an increase in demand, as will chemical and drilling companies.

AMP Ltd already has been increasing its stake in Orica. After becoming a substantial shareholder in the first week of May, AMP announced on May 24 that it had increased its share in Orica by around 3.5 million shares, from a 5.18 per cent holding to 6.38 per cent.

Orica recently reported a first half profit for the period ended March 2002 of $80.4 million, compared with $30.1 million, before non-recurring items, in the previous first half.

Orica CEO Malcolm Broomhead said the company was embarking on a $70 million cost cutting drive in the current year. Orica’s mining services business grew 15 per cent worldwide, while the other areas of agricultural chemicals, fertilisers and industrial chemicals increased earnings before interest and tax by 20 per cent.

The performance of Orica has not gone unnoticed. Since October the share price has more than doubled to rest at $9.13 earlier this week – a price that has not been achieved by the company since 1999, giving a market capitalisation of $2.5 billion.

Kalgoorlie drilling company, Ausdrill, has also come from nowhere in the past quarter, lifting by 369 per cent from around six cents in March to 37 cents this week.

Ausdrill announced earlier this week that it was withdrawing completely from South America, closing down its Chilean operations until market conditions improve.

Ausdrill continues to maintain its interest in African Mining Services with joint venture partner Henry Walker Eltin.

The partners late last year signed a $100 million 24-month extension to their mining contract for mine owner Gold Fields Ghana Limited.

Pinjarra-based driller and explosive firm Brandrill, which had a run-away success in its share price in 2000 and 2001, has plummeted from a high of $2.80 last year to $0.14 this week.

Commonwealth Bank, NM Rothschild Australia Holdings and ING Australia have been driving confidence in the company down.

All three have been deserting Brandrill over the past 12 months.

Two weeks ago the company announced it would pull back on the development of its PCF technology, reducing research spending from $5 million in the current financial year to just $500,000 in a bid to keep the company in the running after an equity raising exercise proved unsuccessful.