Finning International Inc.
Significant fleet replacement win at BHP's Escondida mine in Chile
TSX: FTT | CAD 27.66 | Outperform | Price Target CAD 44.00
Sentiment: Positive
Event – Finning, Caterpillar (not covered), and BHP (covered by our colleague Tyler Broda) announced an agreement to replace BHP's entire haul truck fleet at the Escondida mine, the world's largest copper-producing mine, located in the Antofagasta region of northern Chile. We note that Escondida has one of the largest mining fleets in the world (currently composed of 160+ haul trucks) that will be replaced with the new Caterpillar 798 AC electric drive trucks (operational features of this truck offer significant improvements in material-moving capacity, efficiency, reliability, and safety). Finning's Integrated Knowledge Center, located in Antofagasta, will provide technical support for the new fleet. The first trucks are expected to arrive at the mine in H2 2023, with full fleet delivery over the next 10 years.
Our view and some initial estimates – Overall, we view this as a positive development for Finning. To highlight the potential size of this deal, we reference our prior estimates for the price range and annual Product Support revenue for a new CAT 797 haul truck as we believe the 798 AC electric drive truck is comparable to the 797 truck (for more details, see Exhibit 33 of our Finning initiation). A new CAT 797 haul truck (first introduced in 1998) can sell for US$5-US$7MM. Assuming a similar price per truck for the CAT 798 AC, we estimate a total value of ~$C1.0-C$1.5 billion for the new equipment portion of this deal alone. We also highlight that at Caterpillar's 2022 investor day (see our event follow-up note here), it was noted that mining/resource equipment (including haul trucks) can generate 2.5x the original equipment sales prices in additional parts sales over the lifetime of the equipment. Today's press release notes "maintenance and support service" (which we read as Product Support agreements) for the fleet being renewed. For a CAT 797 truck, we estimate that annual product Support revenue can average C$1.0-C$1.2 million (assuming a ~12-year life). After reaching the ~12-year mark, the truck would typically require a full rebuild, which can cost ~60%-70% of the initial purchase price (in other words, a rebuild can be 30%-40% cheaper than buying a new truck). All in, this is a significant win for Finning (given the size of this package, we believe this was likely a competitive process), and this should position the company well to pursue other similar opportunities in the region.
This announcement today also follows a number of recent notable fleet renewal/expansion wins for Finning. Recent wins have included: 1) the full fleet replacement of Artemis Gold's Blackwater project in British Columbia announced on May 24, 2022; and 2) a fleet expansion at Codelco's Ministro Hales copper mine in Northern Chile, which included an order for 13 CAT 798 AC trucks and a 10-year maintenance/repair contract (announced the same day).