Perenti digs deep to buy drilling specialist DDH1

Mining services major Perenti has bulked up its drilling arm, agreeing to a $405m deal with deep-drilling specialist DDH1 ahead of an expected slowdown for exploration juniors.

Mining services major Perenti has bulked up its drilling arm, agreeing to a $405m cash-and-scrip deal with deep-drilling specialist DDH1 ahead of an expected slowdown for exploration juniors.

While the rush to develop new critical mineral mines is expected to be a boon for drillers in the ­medium to long term, the capital markets have turned away from speculative stocks such as junior explorers amid rising interest rates that are likely to be putting a crimp on the ability of explorers to raise cash.

Perenti said on Monday it would pay 12.38c cash and 0.7111 Perenti shares for each DDH1 ­security, with the friendly deal valuing the specialist drilling company at about $405m, or $1.01 a share.

DDH1 shareholders wanting to cash out will be able to apply to have all their scrip acquired for cash – subject to a $50m total limit – or take only shares in Perenti, in an unusual move aimed at small retail investors.

DDH1 investors will hold a 29 per cent share in the combined group once the deal is complete, with Perenti planning to add to its Ausdrill business when the deal closes.

The deal, if approved, will create a company worth about $1.3bn on the Australian market, with pro-forma revenue of about $3.5bn a year. Acquiring DDH1 will also help weight Perenti’s earnings back towards the Australian market, with about 54 per cent of combined revenue likely to come from Australian operations, as opposed to 47 per cent currently. Perenti managing director Mark Norwell said the merger would help the company position itself for the long term, given mineral deposits were becoming more difficult to find, and deeper underground. “The long-term outlook for a minerals demand requires increased drilling to ensure mining reserves are replaced and expanded. Drilling is also becoming more complex, resulting in larger programs and demand for specialist services,” he said.

DDH1 floated with a reputation of being one of the best deep-drilling operators in the business, specialising in directional drilling from both underground and from the surface. Its feats include a 1.4km hole at St Barbara’s Gwalia mine for a ventilation shaft, which had to hit a target only 4m wide – from the surface – and a 3.2km exploration hole at Northern Star Resources’ Jundee mine, also in WA.

Both companies have plenty of clients at the top end of the industry, but times at the junior end – traditionally the bread and butter work for smaller drilling operators – are likely to tighten over the coming year.

After an extraordinary run on the capital markets amid a post-Covid boom for the mining sector, the capital raising window has begun to close for junior explorers.

The latest quarterly cash flow analysis report from accounting firm BDO shows that cash inflows to explorers dropped sharply in the March quarter, falling 55 per cent to $1.35bn – still high by historical standards, however.

While small explorers are still cashed-up, holding an average of $10.2m, the report also shows that exploration spending slowed in the quarter – although the March period spend is also traditionally lower than the rest of the year due to the impact of the wet season in Australia’s north.

Perenti shares closed down 12.5c, or 9.8 per cent, at $1.15, with DDH1 shares up 5.5c at 91.5c.

Originally published as Perenti digs deep to buy drilling specialist DDH1