IMDEX LIMITED — Annual Report 2011

Aug 14, 2011

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imdex news

Issue 27 | August 2011 | Imdex Limited

Bernie Ridgeway, Managing Director

Dear shareholders

Welcome to Imdex News, the newsletter for shareholders of Imdex Limited (IMD). We are pleased to bring you this edition for the year ended 30 June 2011, the most exciting period in the history of our Company.

As we wrap up on a busy year, we thank shareholders for their continued support. We hope you enjoy reading this summary about our achievements in FY11 and initiatives to grow the business further.

Best ever results

The highlights of our financial performance for the 2011 full year were:

• Record revenue (excluding interest revenue), up 53% to $205.2 million (FY10: $134.3 million)

• Record normalised EBITA up 132% to $48.1 million (FY10: $20.7 million)

• Record normalised net profit after tax from continuing operations, up 196% to $26.0 million (FY10: $9.8 million)

• Dividend reinstated with the payment of a 1.75 cents per share fully franked interim FY11 dividend and declaration of a 2.75 cents per share fully franked final FY11 dividend

• Exceptional growth in cash flow from operations to $35.9 million, an increase of 530% (FY10: $5.7 million)

• Strong balance sheet with gearing (net debt/capital) reducing to 13.4% (30 June 2011: 19.6%) even after the acquisitions of Fluidstar and Mud-Data

• Net assets up 33% to $125.4 million (FY10: $94.5 million).

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Mining Tool Rental Fleet
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Operational achievements during FY11

Having identified significant opportunities for market penetration for both our drilling fluids and down hole instrumentation products, we deployed regional managers to ensure operational efficiencies, a high level of support for global customers, and the realisation of opportunities to gain market share. This strategy has yielded, and continues to yield, excellent results across all major mining regions of Asia Pacific, the Americas, Africa and Europe.

Drilling contractors continue to report strong demand from the major, intermediate and junior mining companies and global rig utilisation rates are also well up at approximately 75 – 80% due mainly to robust commodity prices and increased liquidity.

Imdex has a long and successful history of growth, both organically and through acquisitions. We have integrated eleven strategic acquisitions into the Group over the past six years. In FY11, the acquisitions of Fluidstar and Mud-Data have been complementary to existing operations, and have integrated smoothly into our Group (as detailed within).

Exciting aspects of the business are our technologies and product development which continue to position us as a market leader in both drilling fluids and down hole instrumentation. This requires tremendous effort and dedication from our employees in order to produce leading products using innovation and expertise for application in Australia and globally.

Market review

• Record mining down hole instrumentation rental fleet numbers achieved

• Significantly improved trading and record activity in Asia Pacific, the Americas, Africa and Europe

• Drilling activity continued to be robust in the four major mining regions with the major drilling contractors estimating increased rig utilisation in the year ahead subject to no material deterioration in their markets

• Stronger commodity prices added to upward pressure on the Australian dollar, a mixed blessing for our global business

• Activity in the coal bed methane sector in Australia gathered momentum, although was negatively impacted by flooding during the year.

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Rental levels since February 2008

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MINERALS DIVISION

The Minerals division offers AMC branded drilling fluids and Reflex branded down hole instrumentation, and is aimed primarily at the mining and mining and mineral exploration markets and operates across Asia Pacific, the Americas, Africa and Europe.

In FY11, the Minerals division achieved record revenues up 60% to $177.7 million, representing 87% of the Company’s total revenue for the year.

Key operating highlights

• Imdex’s mining down hole instrumentation rental fleet increased by 337% since the April 2009 low to record levels at the end of June 2011 due to additional drill rig utilisation and growing market share globally (as shown in the graph on front)

• Strong performance across all regions, with record sales in Chile, Mexico, Argentina, Africa and parts of Asia Pacific for AMC

• Regional structure had a significant impact on the business globally, particularly in facilitating product cross selling, operational efficiencies, greater local support for customers, and increasing market share

• Generated the first AMC sales out of Europe during the year

• Record revenue generated given strong demand for Reflex’s rental instruments in Asia Pacific, Canada, Latin America, Europe and Africa

• Reflex continued its active product development and technology improvements

• Commercialisation of innovative drilling fluid recycling technology (previously known as the solids control units) to be marketed in the major mining markets around the world

• Overall winner in the Innovator of the Year Awards in the Western Australian Chamber of Commerce’s Industry and Export Awards in November 2010; and

• Demand continued for Reflex’s newly launched MEMS gyro down hole survey tool within the global mining and mineral exploration market.

OIL & GAS DIVISION

The Oil & Gas division offers AMC Oil and Gas branded drilling, completion and production fluids and Flexit branded down hole instrumentation. This division is aimed primarily at the oil and gas, geothermal and coal bed methane industries.

Oil & Gas division revenue was up 19% to $27.5 million, representing 13% of the Company’s total revenue for the year.

The oil and gas sector has significant growth potential and is a logical diversification from the cyclical minerals industry. Imdex has exciting growth opportunities in the oil & gas sector through an oilfield services joint venture (DHSO) and the acquisition of Mud-Data (as detailed next page).

Key operating highlights

• AMC Oil & Gas brand continues to grow in niche South East Asian markets and onshore Australia and PNG

• Further demand in niche markets for production and completion chemicals developed and produced by Wildcat Chemicals Australia, a wholly owned subsidiary of Imdex

• Continued investment in engineering and product development to maintain an active technology pipeline

• The acquisition of Mud-Data, a drilling fluids and equipment supplier to the oil and gas and geothermal markets in Germany and key parts of Europe, a market with attractive growth opportunities (as detailed on next page)

• Completed a joint venture agreement with DHS Oil – DHSO Services – allowing Imdex to effectively penetrate the global oil and gas down hole survey services markets, effective 1 July 2011. Details of the joint venture are outlined overleaf and in the Investors section of our website.

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Revenue ($million) EBITA ($million)
120 30
Minerals division
109.3 26.9
Oil & Gas division
100 95.9 25
21.2
8.03 19.8 20.0
80 75.9 20 19.0
72.9
69.1
60 57.9 56.7 58.4 15
13.2
12.2
45.9
10.1
40 10
29.5 7.5
23.3
20 5 4.3 4.5
3.0
0 0
2 1H06 2H06 1H07 2H07 1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11 1H06 2H06 1H07 2H07 1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11
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Expanding our business

Imdex has a long and successful history of growth, both organically and through acquisitions. We have successfully integrated eleven strategic acquisitions into the Group over the past six years. In FY11, the acquisitions of Fluidstar and Mud-Data have been complementary to existing operations, and have integrated smoothly into our Group. In addition we have entered into a heads of agreement to acquire Australian Drilling Specialties (ADS), effective 1 July 2011 and System Mud (Brazil), effective 1 August 2011. ADS is a dedicated manufacturer of drilling fluids and chemicals for AMC and owns proprietary PHPA (Polymer) technology which AMC intends to expand further in strategic overseas locations. System Mud provides Imdex access to the growing Brazilian minerals market and the ability to better serve our global customers.

Organic and acquisition growth

Imdex has enjoyed a consistently successful history of acquisitions to increase its global presence, product offerings and expertise. FY11 was no exception.

The acquisition of Fluidstar became effective 1 September 2010, and its specialist products were integrated with AMC’s range of drilling fluids. The business is now benefiting from a combined sales team and an expanded sales presence in South East Asia.

The acquisition of the European based Mud-Data was effective 1 March 2011. This provides a base for Imdex to effectively penetrate the oil and gas and geothermal drilling fluids markets in Europe, with considerable potential for market growth in Germany, Romania and Spain. It will deliver an expanded product range, excellent capabilities and enhanced exposure to the oil and gas and geothermal industries in Europe.

The acquisition was funded from existing cash resources. Whilst MudData did not contribute to profits in FY11, the business is well placed to generate significant revenue and profits in FY12 and future periods.

On 21 January 2011, Imdex announced that it had formed a 50:50 joint venture with DHS Oil Holdings Pty Ltd (DHSO), majority owned by Lime Rock, based in Dubai. DHSO already operates the Flexit technology and the joint venture, effective 1 July 2011, is not expected to contribute meaningfully to revenue and profits in FY12 as it establishes its operations. The joint venture provides down hole surveying services to the onshore and offshore oil and gas industry with the initial market focus on the Middle East, however, the business will expand globally in the coming years and will grow into a substantial contributor to earnings.

Experts in the field

From 1 July 2010, Imdex’s new regional operating structure for the Minerals division came into effect. This divided the business into four operational regions – Asia Pacific, the Americas, Africa and Europe. Many of our customers in the fluids and down hole instrumentation sectors are common so the change has allowed Imdex to facilitate important cross selling opportunities. There are significant opportunities for market penetration for our drilling fluids and down hole instrumentation products, particularly in the Americas, Africa and Europe where benefits have emerged from the shift to greater local representation of technical expertise in these sometimes challenging environments.

The drilling fluids product development laboratory in Osborne Park, Western Australia is adding value with specialised analytical equipment to test and develop fluids used in oilfield, mining, water well and specialised drilling sectors. The ability to offer these services gives Imdex a significant competitive advantage within the mineral drilling fluids market, in particular.

Reflex to the rescue

Imdex was proud to play a role in the successful rescue mission of 33 miners who became trapped at the San Jose underground mine in Northern Chile on 5 August 2010.

Reflex’s Global Product Manager, Kelvin Brown, assisted with the planning and design of the drill hole which successfully intercepted the refuge chamber in which the miners were trapped, some 700 metres below the surface.

Mr. Brown was flown to Chile to help direct the drilling and was on site working with the rescue team when it first made contact with the miners on 22 August, 2010. Reflex’s EZ-Trac survey instrument, renowned for its superior accuracy and speed, was utilised to survey the communications bore hole and orientate the HX Navimotors.

In addition, AMC drilling fluid was also used to increase drilling effectiveness through the hard rock formations. The product is a unique high performance extreme pressure lubricant and cutting oil, with excellent lubricating characteristics that improve drilling penetration rates and reduce wear to drilling equipment.

Since returning, Kelvin Brown has presented on behalf of Reflex at various forums to share the experience and learnings with industry professionals. and has been awarded the WA Spatial Excellence award for his role in the Chilean mine rescue.

As a result of Kelvin’s efforts, Reflex has been selected as a finalist in the outstanding contribution to mining award in the 2011 Australian Mining Prospect Awards to be held in Sydney in September 2011.

Committed to health and safety

During the year, Imdex maintained an excellent record of health and safety for its people, customers and others with whom we interact. During FY11, Imdex achieved a number of quality ISO9001 certifications, including AMC Chile and Reflex Chile.

San Jose mine rescue, Chile

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Outlook

Recent volatility in global financial markets has highlighted the uncertainties and concerns that exist in relation to European and US government debt levels and the slow recovery of the US economy. However, the outlook for our key target markets appears strong given the resilience of global commodities prices and continued focus on exploration by minerals and energy companies.

The mineral exploration market is buoyant with strong commodity prices maintained even during the recent period of volatility in global financial markets. Major, intermediate and junior mining companies have increased budgets and are spending on exploration projects. Metals Economics Group predicts a 70% increase in global drilling activity in the 2010 – 2013 period with exploration spending set to exceed and be sustained above previous record levels. This is confirmed by our major customers who expect drill rig utilisation levels to move towards full utilisation levels in calendar 2011.

The oil & gas market remains strong as global demand for these commodities continues to grow. The dearth of new world class discoveries drives exploration into more and more challenging environments where Imdex’s expertise and technology are well positioned to assist.

Since 1 July 2011 three new growth initiatives come into operation. The first is the oil & gas services joint venture with DHS Oil. This is expected to generate significant upside in future years as the advanced technology of the Imdex Group is combined with the customer network and industry expertise of DHSO Services. The second is the proposed acquisition of Australian Drilling Specialties (ADS), an AMC dedicated drilling fluids manufacturer in Australia. This acquisition allows improved synergies and ownership of fluids technology and intellectual property. The third is the proposed acquisition of System Mud (Brazil) which provides Imdex access to the growing Brazilian minerals market and the ability to better serve our global customers.

Platform for growth

As we enter the new financial year, our focus will be in six key areas:

• Expanding our capabilities and presence in the oil and gas and geothermal markets in Germany and the rest of Europe

• Developing organic initiatives, particularly the fluids recycling technology for delivery to major mining markets around the world

• Continuing to invest in research and product development to extend our product offering and maintain technology market leadership

• Expanding the DHSO oilfield services joint venture globally

• Continuing to grow market share in under-penetrated minerals markets globally

• Integrating the bolt on acquisitions of ADS and System Mud.

Long term global fundamentals are conducive to growing our business and Imdex is well positioned to respond to the growing needs of the sectors in which we specialise.

Subject to there being no material deterioration in our end markets, Imdex’s strong fundamentals and balance sheet, comfortable liquidity position and low gearing, global footprint, leading industry brands and technologies, and strong customer relationships, place the Company in a strong position to continue growing. We look forward to partnering with our customers to ensure our mutual success in FY12 and beyond.

I wish to congratulate everyone, particularly our hardworking, dedicated and loyal staff, who contributed to our record results, recent awards success and our growing number of loyal customers. We remain focused on seizing new opportunities and growing our business for the benefit of all customers and shareholders.

Yours faithfully,

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2011 AGM

The Imdex Annual General Meeting will be held at the Celtic Club, 48 Ord Street, West Perth on Thursday 20 October 2011 commencing 1pm (WST).

Bernie Ridgeway Managing Director

IMDEx LIMItED

Imdex is an ASX listed company providing quality drilling fluids and leading down hole instrumentation to the mining, oil and gas, water well and civil engineering and tunnelling industries worldwide. The Group has two distinct divisions – the Minerals division and the Oil and Gas division, allowing Imdex to service these industries exclusively. With a local presence in all key mining and exploration regions and supported by a network of distributors worldwide, the Group has the global profile and expertise to deliver long term growth.

Imdex News is prepared quarterly to update Imdex’s valued shareholders with important news on performance and key operational activities. Your feedback is always welcome. Please send any comments or suggestions to marketing@imdexlimited.com

CONtACt

Head office

8 Pitino Court, Osborne Park, 6017 WA, Australia PO Box 1262, Osborne Park, 6916 WA, Australia Telephone: +61 8 9445 4010 Fax: +61 8 9445 4042 Email: imdex@imdexlimited.com Website: www.imdexlimited.com

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