We recommended Ausdrill Ltd (ASX: ASL, OTC: AUSDF) in the August 2012 In Focus feature as one of our favorite non-Portfolio companies. In the September 2012 In Focus, which was all about members of the How They Rate coverage universe that raised dividends during the reporting period for fiscal 2012 final results, we discussed Ausdrill because it boosted its final payout for the fiscal year by 23.1 percent, bringing the full-year increase to 20.8 percent.

The primary obstacle preventing us from adding Ausdrill to the AE Portfolio had been the lack of active quotation for the stock on the US over-the-counter (OTC) market.

Though we added Amalgamated Holdings Ltd (ASX: AHD) to the Aggressive Holdings without the stock having an active OTC symbol, we did so because Amalgamated, which otherwise would have been a Conservative Holding, was well worth the effort of venturing to the Australian Securities Exchange (ASX) for a broader swath of investors, what with its increasingly recession-resistant cinema exhibition business underpinning revenue, cash flow and dividend.

It remains a difficult game, picking winners in the resources space, given the still-high level of global economic uncertainty. But companies with high exposure to production as opposed to the capital-investment cycle; with blue-chip clients under long-term contracts; and with records of performance over time are solid bets. Ausdrill, based on its operating results, meets all these criteria.

And now the stock is being actively quoted on the US OTC market, which means it’s available for execution by all but the most in-the-weeds brokerages, under the symbol AUSDF. Note that trading volume on the OTC market is thin.

However, Ausdrill is a AUD900 million company that trades more than 3 million shares a day on the Australian Securities Exchange. Liquidity for one of the few companies that’s building a truly integrated, diversified and global mining services business shouldn’t be an issue.

And, though management maintained the fiscal 2013 interim dividend at AUD0.065 per share, Ausdrill has established a solid record of payout growth amid a tumultuous period for the global resources sector.

Along with full fiscal 2012 results Ausdrill announced a 23.1 percent increase to its final dividend to AUD0.08 from AUD0.065; its fiscal 2012 interim dividend, announced in late February 2012, was AUD0.065, up from AUD0.055 for the prior corresponding period.

Management also raised interim and final dividends in fiscal 2011, 2008, 2007 and 2006. It boosted the final payout in fiscal 2005. During the Great Financial Crisis years of fiscal 2009 and fiscal 2010 Ausdrill held its payout steady. The company hasn’t cut its dividend over the past decade, a time during which it’s achieved significant scale and diversification that underpins steady revenue.

All that being said, Ausdrill once again posted solid operating results, this time for the six months ended Dec. 31, 2012. Based on fiscal 2013 first-half results, management’s forecast for the balance of the year, the record of dividend stability and growth and the stock’s increasing availability to US-based investors, we’re adding Ausdrill to the AE Portfolio Aggressive Holdings.

Ausdrill’s mine production leverage is on display in its fiscal 2013 first-half results, as solid results for its Contract Mining Services Africa (CMS Africa) unit and its core drill and blast services for its Mining Services Australia (MS Australia) unit offset weakness in the areas of its business that are more cyclical.

Production volumes remain elevated across the company’s two key commodities, gold and iron ore, supporting continued strong demand for its production-related services.

Ausdrill also renewed several major contracts, which should ease fears for investors in an environment where miners have looked to in-source or competitively re-bid work to save money. And despite the pullback in capital expenditure across the sector and miners’ increased focus on costs, MS Australia has been able to weather declines in demand for smaller areas of Ausdrill’s business.

Strong relationships with major participants and first-mover advantage in the African gold sector give CMS Africa an edge, and as investment in new mines in the region grows Ausdrill is well-placed to benefit. Although the price of gold has come down in recent weeks, it remains at relatively high historical levels and should continue to support production.

Revenue for the six months of fiscal 2013 was up 13 percent to AUD579 million. Management reported underlying net profit after tax (NPAT) of AUD57.4 million, which was up 1 percent from a year ago on a stronger result for CMS Africa, while reported earnings before interest taxation, depreciation and amortization also ticked up by 1 percent to AUD143.5 million.

MS Australia reported first-half EBITDA of AUD79.3 million, up from AUD77.2 million in the prior corresponding period. The core drill and blast business showed an improved performance despite flat revenues.

Two major contracts were renegotiated in the period, including better terms for work at Kalgoorlie Consolidated Gold Mines Ltd’s Superpit project, the biggest open-pit gold mine in Australia that’s being developed through a joint venture between Barrick Gold Corp (TSX: ABX, NYSE: ABX) and Newmont Mining Corp (NYSE: NEM). MS Australia has also re-upped at Oz Minerals Ltd’s (ASX: OZL, OTC: OZMLF) Prominent Hill project.

These wins were partially offset by Fortescue Metals Group’s (ASX: FMG, OTC: FSUMF, ADR: FSUGY) reduced activity beginning in September 2012. Management noted that grade-control rigs from the cancelled Fortescue work remains un-deployed, while the drill and blast rigs are expected to be redeployed to other contracts in coming months.

Utilization rates of the rig fleet were lower, largely related to the pullback in demand for exploration drilling services beginning in the latter part of calendar 2012. Management noted that this slowdown is expected to continue through the first quarter of calendar 2013 and that the prospect of a recovery is uncertain in an environment where clients are cutting back on costs.

MS Australia’s equipment hire business saw a significant slowdown, resulting in a lower utilization of the fleet. But management expects a recovery in the first half of 2013 due to ongoing construction activity associated with new mining projects in Western Australia.

Best Tractor Parts, the AUD161 million acquisition of which was completed in October 2012, immediately saw a sharp decline in activity levels in the mining industry, especially in Queensland and New South Wales. Management noted a recent increase in inquiries from clients and expects resumption of maintenance activities by the coal mining industry during the first half of 2013.

The integration with Ausdrill’s equipment hire business, Ausdrill Mining Services, with Best Tractor Parts to form a single brand, BTP Equipment, is progressing, and management is currently evaluating synergies and cross-selling opportunities. Another area of focus is bringing Best Tractor to Africa, which management estimated could save AUD2 million in maintenance costs in calendar 2013.

Management acknowledged during its half-yearly conference call that the timing of the Best Tractor purchase wasn’t ideal, coming as it did right as the decline in intended capital expenditure by Australia-based resource companies began to unfold.

There remain, however, opportunities for the merger to generate new revenue and for management to streamline costs, particularly as the new BTP can act as the parts and maintenance provider for Ausdrill’s other businesses in addition to making lower-cost, second-hand parts and equipment available to capital-constrained miners.

The diversification of Ausdrill’s base of mining services should help the business as it seeks to offer greater value to its clients and move into growth markets–for example, coal-seam gas production for export as liquefied natural gas–while also reduce its more cyclical exposures such as mineral exploration.

CMS Africa reported first-half EBITDA of AUD65 million, up from AUD48.2 million during the first six months of fiscal 2012, with growth driven by solid demand from existing clients as well as the commencement of operations at the Syama gold mine in Mali for Resolute Mining Ltd (ASX: RSG, OTC: RMGGF, ADR: RMGGY). The five-year, USD540 million Syama contract is Ausdrill’s biggest-ever deal.

This was partially offset by lower exploration revenues due to the impact of unseasonal levels of rainfall in Burkina Faso.

African Underground Mining Services (AUMS), a joint venture in which ASL holds a 50 percent stake, posted NPAT of AUD26.2 million, up from AUD12.8 million a year ago. The statutory result includes a one-off benefit of AUD6.8 million.

ASL’s manufacturing unit–which includes businesses the make drilling consumables and spare parts, drill pipe, drill rigs and heavy-duty, lightweight trays for off-road, mining and quarry trucks–reported first-half EBITDA of AUD9.1 million, down from AUD12.4 million in the prior corresponding period.

Collectively, Drilling Tools Australia, Remet Engineers, Drilling Rigs Australia and DT HiLoad recorded a 6 percent increase in revenues due to increased sales of lightweight truck trays to the mining sector, offset by a reduction in the sales of drilling consumables. EBITDA declined due to lower volumes for DTA and Remet, which saw one its key clients, Newmont Mining Corp’s (NYSE: NEM) Boddington gold mine, not purchasing drilling consumables while conducting a period of product testing.

The manufacturing unit is a key part of management’s strategy for ASL to be a “one-stop shop” for contract mining services. The business offers continued growth opportunities as it supports ASL’s own needs, including manufacturing rigs for ASL to use on its contract mining services projects, as well as providing consumables needed by its clients.

Demand for consumables has been weak, but the continued strength in production volumes should provide a platform for recovery.

Supply & Logistics–which provides procurement and resource management services to external clients as well as handling these matters for Ausdrill from offices in Australia, the UK, South Africa and Ghana–reported EBITDA of AUD1.6 million, up from AUD800,000 a year ago on increased activity in West Africa.

Although it’s likely to remain a small part of the overall business, Ausdrill’s ability to generate revenue from what otherwise would be a cost center is a definite positive.

Operating cash flow of AUD52.9 million was 23 percent below the AUD68.3 million generated during the first six months of fiscal 2012 due to a AUD23.8 million increase in working capital since June 30, 2012. This increase was driven by a AUD38.6 million reduction in payables.

Ausdrill had capital expenditures of AUD127 million during the period, including AUD44.5 million to cover the ramp-up of the Syama project, AUD54.3 million for Mining Services Australia operations and AUD25.3 million for work in the rest of Africa. Management noted that CAPEX for the second half of the fiscal year depends on winning new contracts but suggested it would limit spending to annualized maintenance costs of AUD30 million to AUD40 million.

The interim dividend of AUD0.065 implies a payout ratio of 36 percent, while Ausdrill’s historic range is 40 percent to 50 percent. This also implies a level of conservatism that’s perhaps appropriate for the moment but also suggests a top-up with the final dividend announcement in August.

Gearing–or net debt as a percentage of capitalization–bounced to 38.2 percent as of Dec. 31, 2012, from 24.5 percent as of June 31, 2012. Ausdrill remains well within its debt covenants, however, with a net debt-to-adjusted EBITDA multiple of 1.58 times versus 0.83 times at the end of fiscal 2012 and less-than-3-times multiple dictated by its lending agreements. Net interest cover was 9.1 times.

Management noted that it recently finalized a AUD300 million syndicated facility, and the company completed a USD300 million guaranteed senior unsecured note offering during the first half of the fiscal year.

Gearing will come down as CAPEX declines in the second half of the year. Overall, the capital and debt structure improved during the first half of the year.

But growth in underlying earnings across Ausdrill’s core production-linked operations remains robust. And 68 percent of fiscal 2013 first-half revenue came from Ausdrill’s drill and blast, CMS Africa, equipment hire and waterwell drilling businesses, all of which are related to mining production.

Management expects second-half results will be better than first-half numbers, as it forecast “at least same level of reported NPAT in fiscal 2013 as in fiscal 2012 of AUD112 million.”

This implies NPAT of approximately AUD57 million for the six months to June 30, 2013, with the increase expected to come from better asset utilization in the equipment hire division. Exploration is expected to remain soft.

The key risk for Ausdrill is an earnings disappointment. Amid a particularly volatile period for the mining industry, what with seemingly endemic cost overruns, the potential for project delays as well as possible loss of contracts and/or slower-than-anticipated new project wins, the market appears to be pricing in a downside surprise.

But Ausdrill’s track record is remarkably free of the types of value-destructive disappointments–as opposed to those caused by timing issues. Although the company’s leverage has ticked higher with the Best Tractor Parts acquisition, there’s little reason to believe it will be felled by a knock-on controversy that in turn threatens its financial or operational stability.

Ausdrill is undeniably cheap at these levels. The market has more than priced in the company’s relatively minimal exposure to the more cyclical side of the mining business as well as the higher debt related to the Best Tractor acquisition.

The stock has rallied strongly off a 12-month closing low of AUD2 per share, established Nov. 29, 2012, and closed the trading day in Sydney on March 14 at AUD2.95. At these levels, using the traditional Benjamin Graham metrics of price-to-earnings (P/E) and price-to-book (P/B), Ausdrill is practically screaming “value.”

With a P/E of 7.45 and a P/B of 1.17 as of March 14, Ausdrill key valuation metrics are both below Mr. Graham’s 15 and 1.5 “magic” levels, and its “Graham Factor,” or P/E times P/B, is just 8.72, well below the 22.5 suggested by Mr. Graham as the line below which value stocks can be found.

Ausdrill trades on the ASX under the symbol ASL and on the US over-the-counter (OTC) market under the symbol AUSDF.

Ausdrill–a new Aggressive Holding in the AE Portfolio–is a buy on the ASX using the symbol ASL and on the US OTC market using the symbol AUSDF under USD3.80.

Eleven analysts rate the stock a “buy,” three “hold” and three “sell.” The average 12-month target price is AUD3.37, with a high of AUD4 and a low of AUD2.75.

Ausdrill’s fiscal year runs from Jul. 1 to Jun. 30. It reports full financial and operating results twice a year; it typically posts first-half results in late February, with full fiscal-year numbers out in late August.

Interim dividends are usually declared in February along with first-half results. Final dividends are usually declared in August along with full fiscal-year results. The recently declared interim dividend of AUD0.065 per share will be paid May 15, 2013, to shareholders of record as of April 16, 2013. Shares will trade “ex-dividend” on this declaration as of April 10, 2013.

The final dividend of AUD0.065 in respect of fiscal 2012 second-half results was declared Aug. 29, 2012. It was paid Oct. 31, 2012, to shareholders of record on Oct. 3, 2012. It traded “ex-dividend” as of Sept. 26, 2012.

Dividends paid by Ausdrill are “qualified” for US tax purposes. Based on the “fiscal cliff” compromise reached in Washington, DC, in early January 2013 dividends will be taxed at Bush-era rates of 5 percent to 15 percent for investors’ first USD450,000 a year of income for couples and USD400,000 for single filers. Above that the maximum tax rate is 20 percent.