Commodity price fluctuations are an unavoidable aspect of investing in mining shares. However, the mining sector represents one of the largest industry sectors on the ASX, making it impractical to avoid completely.
Fund manager IML suggests that investing in mining services shares can be a strategic move for investors who want to stay invested in this significant sector but prefer to avoid the unpredictable fluctuations of commodity prices.
Mining services companies play a crucial role in supporting the operational needs of mining giants, offering essential services ranging from drilling and exploration to equipment maintenance and logistics.
In a recent report, IML portfolio manager Lucas Goode quoted Mark Twain's famous line, "During the gold rush, it's a good time to be in the pick-and-shovel business." He highlighted three ASX mining services shares as follows.
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Imdex Ltd (ASX: IMD)
Imdex operates in more than 70 countries, offering services and products that improve the efficiency and productivity of drilling operations.
The Perth-based company provides innovative drilling fluid products, advanced downhole instrumentation, data management solutions, and real-time analytics to the mining industry.
Goode likes the company despite its dependency on exploration spending because most of its projects are for existing operations, also known as 'brownfield' drilling.
In 1H FY24, the company reported robust numbers, with its revenue rising 18.4% to $235.3 million and normalised net profit after tax (NPAT) up 7.5% to $32.8 billion. Imdex CEO Paul House was pleased with the results, highlighting that its strategy to provide end-to-end solutions helped it gain market share in a contracting market.
The Imdex share price rose 16% over the past year to $2.21 at yesterday's close of trade.
ALS Ltd (ASX: ALQ)
ALS specialises in testing, inspection, certification, and verification services, servicing various industry sectors, including mining, environmental, and life science. The company boasts more than 50% global geochemistry testing market share.
ALS's earnings diversity is one reason the IML fund manager likes this company. Goode said:
As with Imdex, revenue in its Minerals division is exposed to the mining exploration cycle as each drilling sample must be independently tested to determine its composition.
In addition, ALS also performs mineral assays for ongoing mining operations, with regular testing of production ore and definition drilling required for mine production to continue.
This diversity of earnings combined with market share gains has allowed ALS to remain highly profitable, even during mining downturns, and grow through the cycle with revenue increasing 10% compound from FY2008 to 2023.
IML is not the only one that is positive for ALS. In June, Morgans also listed ALS as one of its top ASX 200 shares, as my colleague James highlighted. Analysts at the broker cited ALS' dominant market share and superior cash generation as reasons to like this ASX share.
Over the past year, the ALS share price surged 26%, closing at $14.49 yesterday.
Orica Ltd (ASX: ORI)
Orica is a global leader in explosives and blasting solutions. Headquartered in Melbourne, it services the mining industry, providing essential products and services that enhance safety and productivity.
Goldman Sachs resumed coverage of this commercial explosive company in May after the impressive first-half results, as my colleague James highlighted. In 1H FY24, the company delivered a 10% growth in its operating and underlying NPAT.
Management believes the solid profit growth was due to strong customer demand across its core products and services. The company also saw higher earnings from its high-margin premium offerings.
IML's Goode believes that "Orica's scale drives outsized returns relative to industry peers", and the company should benefit from synergies from the recent acquisition of Cynaco, a mining chemical peer.
The Orica share price rose 17.2% over the past year to $17.70 at the close on Thursday.
