DETERMINING TRUE VALUE IN A VOLATILE MARKET

Australia’s mining sector is facing one of the toughest periods in history, with 2016 being defined by weak domestic opportunities and falling commodity prices forcing companies to re-examine the costs structures of operations.

Slowing economic growth, reduced exploration and the end of the construction phase for many sites is pressuring some of the largest mining companies to sell assets to reduce debt and improve cash flow.

According to Hassalls Australasian Sales Director Rob Alexander, the size of the market of assets for sale is substantial and supply is outpacing demand.

Hassalls is an Australian auction, remarketing and valuation company working alongside some of industry’s biggest companies, as well as banking and insolvency firms to effectively remarket used assets.

“What is listed for sale today is probably one third of the total sellable market. Compared to five years ago, owners are holding equipment for much longer terms and running machines they would have rebuilt or replaced on site,” says Mr Alexander.

“Reduced cash flow for many asset owners means moving from preventative maintenance to reactive maintenance. In other words, they are servicing assets only when it’s urgent, instead of by the recommended manufacturer schedule.”

Mr Alexander believes this is causing misunderstanding around the value of older assets that have not been maintained, especially during forced sales or liquidation processes.

“In a volatile market, it’s easy for financiers to be mislead and over value an asset,” he says.

“To determine the true value of an asset and maximise sale price there are key factors to consider.”

ASK THE RIGHT QUESTIONS
“It’s impossible to determine the value of an asset without having the full picture and asking the right questions,” Mr Alexander says.

Every owner should be able to answer and provide the following key details:

• Year of manufacture
• Make and model
• Frame and component hours
• Detailed report showing maintenance carried out during the life of the machine
• Manufacturer’s scheduled maintenance program
• Any issues (past or present) with the equipment

Mr Alexander recommends ensuring that a third party appraiser inspects the machine to provide an independent and credible valuation.

“An appraiser should fine-tune their approach based on the circumstances, but proper communication during and after the scoping process is critical to ensure the best possible result,” he says.

“Many of our valuation requests originate with a lender seeking to finance a new loan or requesting liquidation value scenarios, like an auction or private treaty.

“These values are often needed to solidify a sale offering or to provide further confirmation of market value so it’s critical to work with an appraiser with experience in the valuation process and the resources industry.

“Once we know the details of the machine and how well it’s been maintained, we can start to determine the value of the item.”

CONSIDER THE HOURS
Mr Alexander warns that the hours logged for an asset may be misleading and there are traps financiers should be aware of.

“It’s important to understand the difference between frame and component hours on a machine, which can provide a better indication of how much useful life is left,” he says.

“Don’t be fooled by the component hours. This information gives you a good indication of the engine, but fails to provide a clear snapshot of the whole asset which might be showing cracks or wear at the joins,” Mr Alexander says.

“Both component and frame hours are required to give an overall indication of the asset’s condition.

“Buyers are looking at life left on components and frame hours. Cash flow is tight for everyone so no one is willing to spend on a machine that will need to be serviced immediately or replaced in the short term.

“Even if owners are selling an earlier model with more hours for ‘a bargain’, assets with good component and frame hours will sell faster because they are a better investment long term.”

Mr Alexander also warns against machines that have been rebuilt for sale, noting that sellers are not seeing the return on the money spent.

“During the boom it made sense for people to rebuild a machine because demand was high and gear was in short supply, they could be used on site for years to come and would therefore hold its value. But today, we are seeing the value of a rebuild wash out within 12 months,” he says.

“You could spend $200,000 on a machine rebuild but it may only still be worth $280,000 because the demand for older machinery is just not there.”

CONSIDER THE MARKET
Mr Alexander believes it’s extremely important to consider demand and supply in the valuation analysis, as an abundance of similar machines will cause market saturation and push sale prices downward.

“The market can flood quickly, so knowing the demand for different types of machinery always helps,” he says.

However, he recommends keeping the assets on site instead of moving them interstate or to a capital city, even if there is a large quantity of similar machinery for sale in the area.

“We usually see assets sell better on site and in the dirt because it assures buyers the machine is working and it reduces transport and mobilisation costs for both sellers and buyers.”

CONSIDER THE FORECAST
While Mr Alexander says supply is stable, he does not expect demand to rise anytime soon and asset values are likely to remain steady.

“We could see a few bubbles of demand pop up here and there but this increase won’t correlate to an increase in asset value because cash flow remains tight,” he says.

“Less than six year ago, companies were buying and paying off a $2 million machine in two years, which would now take five or six years to pay off.

“In the past we also saw a lot of speculative buying, where people would buy equipment when they thought they were close to winning a contract or if they spotted a good deal.

“Today, unless contractors can secure a very good deal to replace an older asset, they are waiting until contracts are confirmed and purchase orders are held before they consider spending.

“While there are still large and mid-scale contracts up for grabs in the hot spots like Bowen Basin and Hunter Valley that will continue to need equipment, smaller construction players and farmers looking to upgrade their stock will make up the majority of buyers in the next year.”

The mining industry’s contribution to the Australian economy is now $121 billion a year. In terms of export income, it generates $138 billion per annum, which represents over half (54 per cent) of total goods and services.

As the industry enters the next phase and mine sites finish up or look to offload excess stock, there has never been a better time to understand the value of assets.

ROB ALEXANDER – HASSALLS, AUSTRALASIAN SALES DIRECTOR 
As Hassalls’ Australasian Sales Director, Rob draws on his extensive experience from the broader Australian market as a commercial finance and equipment specialist to provide his expertise to Hassalls’ clientele. With more than 25 years experience, Rob advises top financiers across Australia, giving advice that allows them to retain control over asset disposal while ensuring maximum efficiency and effectiveness. Rob is a firm believer than financiers must be provided with as much credible information and insight as possible in order to understand the true value of equipment – particularly fol