Oscar Oberg discusses four observations from a recent trip to Perth and shares his top stock picks poised to benefit.
The mining services sector was the first sector I ever worked on as an equities analyst when I started out in the market 14 years ago and it is fair to say that over that period, I have seen a fair share of highs and many lows. Right now, the environment for these companies is the most positive the WAM Capital (ASX: WAM) team and I have seen. Usually when we have seen periods like this, we ask ourselves the question, “is this too good to be true?”, but in this case we see other factors unrelated to commodity prices that can continue elevated spending from the miners, that in turn can benefit mining services companies.
The team and I travel to Perth three to four times a year to meet with the management teams of a range of mining and mining services companies, both listed and unlisted. Last week, Senior Investment Analyst Shaun Weick and I visited 10 companies across two days and came back to Sydney feeling the most positive around the sector than we have been for some time.
Labour constraints are easing
During COVID, a number of companies were impacted by higher labour costs due to a scarcity of labour and the resulting lower productivity as staff turnover increased. Most of the mining companies are based in Western Australia, namely the iron ore areas of the Pilbara, and the pandemic presented inefficiencies and barriers in travelling between states across Australia. The easing of these restrictions had an immediate positive impact on the sector, strengthening the outlook.
More importantly, the price of nickel has collapsed over the last 12 months, and in more recent times we have witnessed a fall in lithium pricing which has seen a number of projects being halted, improving the availability of labor. With mining services companies having a large exposure to iron ore, gold and copper, we think improved levels of productivity and a reduction in staff turnover can benefit mining services margins.
Sustaining capital expenditure will continue
The three iron ore majors BHP Group (ASX: BHP), Rio Tinto (ASX: RIO) and Fortescue (ASX: FMG) have a vast production profile that they need to sustain every year as reserves deplete. Mines are also getting deeper and more remote which impacts the cost of production. This means that mining services companies exposed to the production profile of the three iron ore majors are set to benefit from continued capital expenditure irrespective of near-term volatility around commodity prices.
Critical infrastructure is also ageing and needs to be replaced. We see the potential for a looming replacement cycle for car dumpers, rail networks, port infrastructure, stackers and reclaimers, which will be positive for the incumbent mining services companies.
Power infrastructure
The landscape of Australia’s power infrastructure is undergoing a seismic shift, driven by renewable energy expansion and decarbonization. Historically, Australia’s power grid was anchored by coal-fired power stations positioned along coastal regions near populated areas. From those coal power stations, there is a network of power lines, substations and power stations that continue to extend through every state, right through to the most remote areas. With a large number of renewable projects being developed in remote areas, an extensive network of power lines and infrastructure is now required to feed back into populated regions. For these reasons we see unprecedented infrastructure spending into power to modernise the electricity grid.
At the same time we are seeing companies across the mining sector push towards long-term net zero emission targets. This shift places additional pressure on the existing power infrastructure, necessitating rapid updates from its current and very old technology, to accommodate renewable energy.
Defence
Similar to other governments globally, Australia is ramping up its defence expenditure. Recently the Federal and Western Australian government announced the creation of a new precinct at Henderson in WA which will be focused on shipbuilding and the maintenance of nuclear powered submarines. Mining Services company, Civmec (ASX: CVL) suggests this spending could be tens of billions of dollars.
The way to play mining services
Looking at our investment portfolio, we are positive on the outlook for NRW Holdings (ASX: NWH), which is one of the largest civil earthworks and contract mining companies in Australia. NRW Holdings have a strong management team and a robust balance sheet which we think will be used or accretive acquisitions. We hold the company in the WAM Capital and WAM Active (ASX: WAA) investment portfolios and we believe the stronger than expected outlook can drive earnings upgrades over the course of the year.
One of our largest holdings in the portfolio, ServiceStream (ASX: SSM) has a dominant exposure in telecommunications and utilities maintenance across Australia. In the 2024 financial year the company had elevated tendering costs in relation to bidding for defence maintenance work, with a number of contracts being awarded in early 2025. Defence is usually a very tough sector to enter, so in the event ServiceStream was to be successful winning a contract in this space, we would take this as a major positive for the company and a catalyst for the market to re-rate the share price higher.
The second company we like is GenusPlus Group (ASX: GNP). GenusPlus is one of the leading engineering companies for power in the country, largely transmission lines or power lines, and is exposed to the electrification theme. The business is founder led with CEO, David Riches owning 49% of the shares on issue. The business is running a number of projects, both in the resources sector and the infrastructure sector and we believe GenusPlus can deliver above its 20% earnings growth forecast for the 2025 financial year.
Another company is Austin Engineering (ASX: ANG), a manufacturer of buckets and truck trays for the mining sector. Austin Engineering have a strong exposure to the iron ore majors, and despite reporting a slightly weaker than expected result, we believe the company are gaining momentum for a strong FY2026, largely due to plans to double the capacity of the North America and South American manufacturing facilities.