Macmahon Holdings Targets Growth with Underground Mining and Civil Infrastructure Focus

About Macmahon Holdings Limited

Macmahon Holdings Limited (Macmahon, the Group, ASX: MAH) is an Australian company providing mining and civil infrastructure services to clients throughout Australia, and Southeast Asia. Its mining services range from mine development to materials delivery, including design, construction, and on-site services. Macmahon manages mines for mining companies across a variety of base and precious metals and commodities. Its segments are Surface Mining, Underground Mining, and Civil Infrastructure. The Group is based in Perth and today employs 9,676 people. Macmahon was founded in 1963 by Brian Macmahon, an Adelaide engineer, and listed on the ASX in December 1983.

Focus on underground mining and civil infrastructure projects

Macmahon is successfully executing on its strategy to reduce the capital intensity of the business by diversifying its revenue sources to include more underground mining and civil infrastructure projects. These projects are typically less capital intensive than surface mining and support higher returns on capital employed. The lower capital requirement is partly because underground mining produces less waste compared to surface mining and doesn’t require the removal of large amounts of overburden material. Underground mining with a smaller surface footprint is more targeted and requires smaller sized mining equipment compared to open pit mining.

Underground mining is approaching 30 percent of Group revenue compared to about 7 percent five years ago. A key strategic step in building scale in underground mining was the purchase earlier this year of an underground contracting mining portfolio through the acquisition of the Emeco subsidiary, Pit N Portal. As part of the Pit N Portal transaction, Macmahon took over the contract mining services provided at the Daisy Milano underground project owned by Vault Minerals. This project has recently been extended to October 2026 and is expected to add $90 million of revenue to Macmahon’s secured forward order book.

A significant feature of the Pit N Portal acquisition is the 220 employees now working for Macmahon, at a time of labour shortages within the mining industry. These employees have been fully integrated into Macmahon’s underground business at the Daisy Milano project together with the existing fleet required for the project.

Capital light business model to boost return on capital employed

As well as focusing on less capital-intensive underground mining activities, Macmahon is seeking to further reduce the capital intensity of the business by minimising the capital expenditure on mining equipment necessary to fulfil existing mining contracts. This outcome was achieved in April 2024 when Macmahon sold $44 million of its mobile equipment fleet at the Dawson South project in Queensland. The fleet has been retained on site and utilised on the project by Macmahon which remains as the mining contractor at this open cut steel making coal mine where it has a workforce of 210 employees. No new capital expenditure by Macmahon will be required at the Dawson South mine site.

The sale of the equipment under the revised contract terms improves Macmahon’s cash-backed return on average capital employed in the business and improves sustainable free cash flow generation. This is because less capital is required but returns remain about the same. The strategy is consistent with Macmahon’s stated objective to increase the Group’s return on capital employed to 20 percent, from the current 15 percent.

By not owning the equipment it uses at mine sites, Macmahon can retain more of its cash earnings and apply the surplus cash to pay down debt or distribute it to shareholders. This is because less of the cash from operations must be retained to invest in more plant and equipment as the business grows. A higher level of ‘cash-backed’ earnings means that there is additional cash available to increase the dividend payout ratio to shareholders and to reduce the level of corporate debt.

Looking ahead

Macmahon has announced that it plans to boost the proportion of revenue from less capital-intensive underground mining activities to 45 percent of revenue within the next two to three years. Underground mining activities currently account for about 29 percent of revenue.

Macmahon, as part of the Pit N Portal transaction with Emeco, has also entered a long-term strategic equipment rental agreement with Emeco that provides growth flexibility and enhances free cash flow generation for the Group. Macmahon is also seeking more work sourced from the less cyclical non-mining civil construction sector, including renewables and government infrastructure projects such as roads and bridges.

The long-term benefit of these strategic initiatives for Macmahon shareholders is a higher dividend payout ratio and enhanced returns on capital employed. Macmahon has committed to increase the dividend payout ratio to the range of 20 percent to 35 percent from FY25. This re-freshed capital-light business model should ensure steadily increasing shareholder returns in the medium term.