Essa keeps digging
Friday, 3 October 2008
Last Updated: Friday, 3 October 2008
By Tim Treadgold
Turmoil on global financial markets has hit the resources sector hard. But as Darryl Stevens, chief executive of mining equipment supplier Essa explains, the mining won’t stop because commodity price are falling.
Prices may be falling, but volume isn’t. That’s the first lesson for anyone wondering what happens to the resources sector when global financial markets go into meltdown, as they are at the moment.
The second lesson is that someone always makes a profit from volume, such as the specialist mining equipment supplier, Essa Australia.
Generations ago, firms such as Perth-based Essa where referred to as “pickaxe” sellers. They did not take the risk of digging, but sold the pickaxes to those who did.
Essa’s speciality products are more technically advanced than pickaxes, but the principal behind its core business of designing and manufacturing mineral sampling equipment is identical.
Most mine sites in Australia, and many overseas, use an Essa device to extract, crush, or grind samples of ore for assaying, or use Essa’s consumable products such as the pots, pans and crucibles used for assay preparation.
Over the past five years, as Chinese demand for resources grew, so did Essa’s business, with sales in the year to 30 June up by 53.7% to a record $43.6 million, and profit up by 37.2% to a record $4.5 million. The latest result followed a 57% growth in revenue and 79% growth in profit in the previous financial year.
Essa chief executive, Darryl Stevens, says that despite lower mineral prices and most mining companies suffering sharp share price declines, he expects more strong growth because the volume of exploration drilling and mineral production remains strong thanks to China’s continued economic expansion.
“We’re a business exposed to the real economy,” says Stevens. “Exploration might slowdown, and mineral prices might contract, but the mining doesn’t stop.”
There isn’t much exotic about the equipment Essa makes. Its mineral preparation gear includes jaw crushers, cone crushers, and roll crushers. Its sampling gear includes devices that scoop minerals off conveyor belts and equipment that measures variables in an ore stream such as moisture.
One of Essa’s more interesting pieces of speciality equipment is a rotary machine that separates the millions of diamonds produced at the Argyle mine in WA into representative parcels for valuing – an essential step to avoid the need to study every individual gem.
It hasn’t always been easy going for Essa, and the current market crash would be bringing back some painful memories for the company.
In the last great sharemarket collapse in 1987 the company was caught on the wrong foot, having just gone through a delicate management buy-out at the same time as cheap imports hit one of its cash cows, the production of crucibles and cups used in mineral assay work.
“Back then, we even had the bank demand immediate repayment of a $2 million loan, which almost sent us under,” Stevens says. “That caused a few problems and it wasn’t until 1990 that we got out of the woods.”
At the time of its brush with a demanding bank (National Australia, if you must ask) Essa was a much smaller business, turning over $1 million a year and employing 20 people. Today, staff numbers have grown to 130 and the business has expanded to include offices in South Africa, Brazil, Germany, Chile and Russia.
In effect, Essa has followed the expansion of the mining industry. But as well as following its customers, which include some of the world’s biggest miners, Essa has also exported Australia’s high standards in measuring and testing mineral samples.
One of the most important “exports” has been to train European and Russian miners and explorers to test much bigger samples of rock to get more accurate measures of their mineral content. In Europe the standard used to be only 500 grams per sample compared with Australian miners testing three kilograms at a time – six-times the volume.
Stevens says roughly half of Essa’s sales are of sampling equipment and half preparation of samples for assay.
As well as its range of standard products, two major growth areas have been added in the past three years. A robotics and automation division is generating close to 15% of annual sales and a majority stake in a maritime repair and testing service is also accounting for 10% of sales.
“We see automation and robotics as a major growth area,” Stevens says. “There are a range of factors attracting our clients in that direction, including faster throughput of assays and samples, down to occupational health and safety issues, which include employees being limited to lifting 10 kilo loads at a time in a repetitive job.
“Automated systems were the standout area of our sales performance last (financial) year, reflecting our heavy investment in research and development in that area.”
However, the bread and butter for the business remains its standard equipment product range of mineral crushers and grinders, followed by sales of what Stevens describes as Essa’s range of “high margin wear and spare parts” – the consumables used in the mineral testing business.
Essa’s exposure to the resources sector has proved an attraction to investors. Since listing at 25c a share four years ago, the stock has traded as high as $1.50 earlier this year, before retreating to recent sales around 93c, a price that capitalises the business at $47 million.
Stevens says Essa’s business outlook, despite uncertainty on world financial markets, is strong.
“We’re not going to match the 50% revenue rise of the past two years, but we will continue to grow,” he says. “We’ve never had a year when we’ve gone backwards.”
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