Deal focus: Allegro brings driller back from the brink

The strong rise in iron ore prices during recent months - along with some spotty rallies by coal - is gradually restoring confidence to Australia's post-mining boom investment market. As demand for wounded mining services companies returns, a race has begun to secure and consolidate the most valuable casualties of the downturn.

Allegro Funds Group has targeted this opportunity with a A$15 million ($11.2 million) acquisition of JSW Australia, a subsidiary of Hughes Drilling, which entered administration in September. "It's a good operating team that is highly regarded in Western Australia," says Adrian Loader, a managing director at Allegro. "In addition, the company has continued to win contracts despite its parent being in administration, which was a good sign for us."

Formed in 2010, JSW offers complete packages in mining and civil drilling and blasting. This includes capacities in grade control drilling of ore bodies, water supply and dewatering and resource definition. Further competencies encompass directional drilling and gas field infrastructure operations. The company has a fleet of 18 drill rigs and employs about 140 staff.

Value-add efforts will focus largely on providing growth capital and management input in order to improve governance and stabilize the business. In its final half-yearly report before entering administration, Hughes indicated revenue of A$45 million, down from A$55 million a year earlier. Profit fell from A$7.4 million to A$3.4 million in the same period.

The collapse of a company with a viable asset such as JSW highlights how the uptick in sentiment around Australia's mining services space could create the perfect environment for turnaround specialists like Allegro. This is because the industry's physical equipment and talent is still intact - all that is lacking is a supplier of capital with an appetite for the kind of cyclical assets that the country's major banks are unlikely to embrace.

The recapitalization's key practical hurdle will be to build the finance and systems infrastructure around the existing team in order to make their job of steadying the company easier. "Given our expertise and a track record in deploying such systems across our portfolio companies, we are looking forward to this challenge," says Loader.

Allegro aims to achieve this by leveraging its past experience in drilling, other mining services and similarly capital intensive businesses in other sectors. Loader says leaning on this background has been crucial in managing the firm's business risks as well as identifying the opportunities available in the broader market and focusing on areas of opportunity such as managing equipment fleets.

"We see a range of opportunities in the sector, including from existing and new contracts, acquisition of strategic capital equipment and potential M&A," he adds. "We're also confident in the long-term production prospects of our key customers and commodities."

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• Topics
• Australasia
• Restructuring
• Buyouts
• Industrials
• Australia
• Allegro Funds
• Commodities