SNC Sees Commodities Rebound Lifting Mining Margins and Backlog

(Bloomberg) -- SNC-Lavalin Group Inc. expects to bolster margins in its mining and metals business as soon as this year amid a rebound in commodities such as copper and fertilizers.

A pickup in demand will help Canada's biggest engineering and construction company boost earnings before interest and taxes in the sector to 7 percent of revenue over time, Jose Suarez, who runs the mining unit, said this week. EBIT fell to 4.7 percent of revenue last year -- the worst performance among SNC's five engineering and construction units.

“We feel pretty bullish,” Suarez said in an interview at the company's headquarters in Montreal. “We are looking at some things in the short run that are going to pump up the backlog. The bidding pipeline is very healthy.”

Improved results in mining and metals is one reason SNC is forecasting higher profits in 2018. Adjusted per-share earnings will be C$3.60 to C$3.85 this year, an increase of at least 13 percent, the company said Feb. 22.

Mining and metallurgy at SNC is a C$433 million ($337 million) revenue business with about 1,200 employees and a C$600 million backlog of work at year-end. SNC booked about C$800 million of mining and metallurgy orders in 2017.

“They're coming off a massive bust in mining, but things have bottomed in terms of backlog at least,” Yuri Lynk, an analyst at Canaccord Genuity in Montreal who recommends buying SNC stock, said in an interview.

Shares Lag

SNC's shares have underperformed their Canadian industrial peers. The stock gained 2.5 percent over the past 12 months, trailing the 11 percent increase of the S&P/TSX Industrials Index. SNC rose 0.6 percent to C$55.99 in Toronto Thursday for a market value of C$9.8 billion.

“SNC has great experience in many types of minerals, so they are well-positioned for when the rebound comes,” Chris Murray, an AltaCorp Capital analyst, said in a telephone interview from Toronto.

To be sure, mining growth may be curtailed as China's economy -- a key driver of demand for commodities -- expands more slowly than in the early part of the millennium.

“China is not growing at 10 percent anymore, so this cycle may not be as prolific as the last one,” Lynk said.

Latin America and the Middle East are now SNC's strongest regions for mining and metals activity, and “we expect that to continue,” Suarez said. “Our key prospects are going to be in copper, fertilizers and the metals that are involved in the creation of batteries for electric cars. This is going to be a continued area of growth for us.”

In December, SNC was selected as partner by Clean TeQ Holdings Ltd. in the development of Clean TeQ Sunrise, a nickel, cobalt and scandium project in Australia, to produce a project proposal and target cost estimate. SNC's work will include engineering, procurement and construction services. A final investment decision is expected to be made this year.

SNC would be in line to book “several hundred million dollars” if the company wins procurement and construction management work from Clean TeQ, Lynk said. “The December announcement doesn't move the needle, but if this thing goes ahead, it will be big for them.”

To contact the reporter on this story: Frederic Tomesco in Montreal at tomesco@bloomberg.net.

To contact the editors responsible for this story: Jacqueline Thorpe at jthorpe23@bloomberg.net, Brendan Case at bcase4@bloomberg.net, Steven Frank

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