Perenti: The 'undervalued' mining services play, leveraged to gold with stable dividends

There's a lot to like about mining services companies, as most trade at undemanding valuations, with strong cash flows, and exposure to key themes like electrification and gold.

The sector presents attractive opportunities for value-conscious investors. According to Bell Potter's January 2025 analysis, larger-cap names Macmahon and Perenti stand out as particularly cheap, trading at forward price-to-earnings ratios of 6.8x and 9.7x respectively.

Source: Bell Potter | January 2025

Both companies are heavily weighted toward the gold sector and typically require higher capital expenditure to sustain their services. While MacMahon has traded sideways this year, Perenti has found renewed momentum through a series of major contract wins with gold mining customers.

From Setback to Breakout: Perenti's Recovery Story

Perenti shares had largely traded sideways since June 2020 until recent contract wins sparked a revival. The company's journey over the past year illustrates both the challenges and opportunities in mining services.

• Zone 5 contract loss: Perenti's subsidiary Barminco lost a significant underground mining services contract at the Zone 5 copper mine in Botswana, operated by Khoemacau Copper Mining. The contract, initially awarded in 2019 and valued at approximately $800 million over five years, was terminated despite generating over $1 billion in revenue across five and a half years.

• First-half FY25 results: Perenti shares fell 15.6% after first-half FY25 earnings missed market expectations. Late debtors totaling $42 million contributed to negative free cash flow during the period (fully paid in early 2H25).

Following these challenges, Perenti has secured several major contracts that have transformed its outlook:

Source: Perenti

This contract momentum, combined with a strong gold price environment, has helped Perenti rally 15% year-to-date to a five-year high.

Perenti 12-month price chart (Source: TradingView)

Below, we take a deeper dive into Perenti, taking a closer look at recent contract wins, analyst forecasts, its price chart and some key insights from management.

A Deeper Dive with Perenti

In a recent discussion, with Perenti's Head of Investor Relations – Jono van Hazel, touched on several key areas:

On Dividend Policy: The company targets a payout of 30-40% of underlying net profit after tax, with analysts forecasting a dividend yield of approximately 4% over FY25-27. Since reducing leverage below 1.0x, Perenti has resumed dividend payments while also conducting share buybacks.

On Valuation Discount: Management believes the share price has been mispriced, though recent gains have begun addressing this. The company highlights its significant scale and operational excellence across multiple service offerings, with its Contract Mining division containing world-leading underground mining businesses in Barminco and AUMS.

On Capital Intensity: Management argues that capital intensity has been overstated. While the company invested heavily in FY22 for new projects, this delivered excellent free cash flow in subsequent years. Underground mining is less capital intensive than surface mining, with smaller, highly interchangeable equipment. Given over two-thirds of the business is underground, these benefits are flowing through to results.

On Gold Price Impact: While internal tendering processes haven't changed based on gold prices, the company is seeing more gold-focused clients seeking expansion opportunities. Production drilling remains busy, and gold exploration is picking up.

New contracts with no new capital growth requirements: Management explained that the three contract extensions are essentially continuations of existing projects, with elements of scope increases over time, enabling minimal growth capital requirements. Normal replacement capital expenditure is included in the guidance and these projects were included in FY25 budget forecasts. Additionally, some projects have capital expenditure costs covered by clients, which naturally reduces our capital costs.

Looking Ahead: Pipeline and Prospects

Citi analysts highlight four upcoming contract renewals that could drive further growth:

• Cowal: Underground development and production works under a $520 million, 4-year contract with renewal negotiations underway

• Dalgaranga: 10-month underground exploration drill drive construction contract commencing in 1Q25

• Ernest Henry: Underground development work with procurement for additional work expected in FY26

• Geita: Underground development and production services with renewal process expected mid-FY26

Citi forecasts modest but steady growth, with the latest contract awards "effectively filling the net EBITDA gap left by Zone 5." The analysts expect Perenti to successfully replace Zone 5 revenue by FY26, with additional upside potential if the exploration cycle improves.

Their forecasts show steady growth trajectory:

Source: Citi (June 2025)