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Is this ASX small cap the best way to profit from the $75 billion mining construction boom?

Rio Tinto share price

In December 2018, The West Australian estimated that opportunities in the mining sector were worth approximately $75 billion, an estimate that omits later announced projects like Fortescue Metals Group Limited (ASX: FMG)’s $3.7 billion proposal for its Iron Bridge project.

On Monday, Mondium announced it had secured a $400 million contract for the design and construction of the Western Turner Syncline Phase 2 (WTS2) mine from Rio Tinto Limited (ASX: RIO). This is Mondium’s largest contract award in its short life since 2017 and builds on a successful track record of major projects from the lithium sector. 

Mondium is a 60/40 joint venture between Monadelphous Group (ASX: MND) and Lycopodium Limited (ASX: LYL), which was created to address opportunities within the mineral processing sector.

Monadelphous provides the multidisciplinary construction experience, while Lycopodium provides the technical engineering expertise in minerals project delivery, giving Mondium a vertically integrated delivery model with no interface issues. 

Lycopodium’s current projects tend to be in the feasibility study and design end of the construction sector, with a few medium-sized projects in the design and build space. This is often very lumpy by nature depending on market conditions and prevailing sentiment. Even in a mining boom, each construction project is a complex sale with differing profit margins across the long life of a project’s execution phase.

Accordingly, the Lycopodium financials show the ups and downs of a company tied to the cyclical mining sector with a marked downturn in revenues and profits in 2014, the last low point in the mining cycle. 

The lacklustre performance in equity growth in the 5 years since the 2014 downturn is somewhat understandable as Lycopodium deploys intellect and skills, not machines. However, its inconsistent sales performance is something to keep an eye on. 

On the positive side, Lycopodium’s earnings per share has grown at a compounded average rate of 27.2%, helping the company to show an average return on capital employed (ROCE) of 34% over the past 3 years. This is an impressive return in any industry. 

The company doesn’t disclose the Mondium contribution in its annual report, nor is there a clear view of the forward order book value or stability. They do, however, have a lot of good ongoing contracts in place. 

Foolish takeaway

I have always seen Lycopodium as a pugnacious company punching well above its weight division. The JV in Mondium was a stroke of genius for both companies – it is very credible and has generated new revenue streams for both parent companies. 

Of all of the engineering and construction firms in Perth, I think Lycopodium is the best placed to profit from mining construction spending, both through its own continuing operations and via the Mondium JV. 

Personally, I intend to purchase a small amount when the Lycopodium share price is under $6 to tap into current expansion spending. Over the next 12 months I will be looking to see what actions the company is taking to make its sales more consistent before committing to a greater investment.

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Motley Fool contributor Daryl Mather owns shares of Fortescue Metals Group Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Daryl Mather