The Capital and Exploration Expenditure Cut – It’s Only Just Begun!
Shareholders of Rio Tinto (ASX:RIO) and BHP Billiton (ASX:BHP), the world’s largest mining companies, have been pleased with their recently released profit announcements. Yet, upon closer inspection, shareholders of some mining services companies may not be pleased.
In its first-half results for 2014, BHP reported revenue growth of 5.9 per cent to US$34 billion, and underlying profit growth of 30.6 per cent to US$7.8 billion. This improvement was primarily driven by an aggressive cost-cutting program. Capital and exploration expenditure, for example, was cut from $11.05 billion to US$7.94 billion, a reduction of US$3.1 billion – or 28 per cent.
Rio Tinto has experienced similar operational leverage in its 2013 full year results. Rio generated flat sales of US$54.6 billion, while underlying earnings increased by 10 per cent to US$10.2 billion. Capital expenditure was cut from US$17.6 billion in 2012, to US$12.9 billion, and is forecast to decline to under US$11 billion in 2014, and to US$8 billion in 2015. That’s a $9.6 billion reduction in four years!
The slowdown in spending is having a negative effect in the mining services industry. Monadelphous (ASX:MND), one of the largest mining servicing companies in Australia, released its 2014 half-year results on February 18. Compared to the first half of 2013, MND recorded a decline in sales revenue of only 1 per cent, to $1.28 billion, while its underlying net profit after tax was flat at $79.2 million, with earnings per share of only 86 cents. The company announced that just $700 million worth of new contracts and contract extensions were secured in the year-to-date, compared to at least $1 billion a year ago.
The market cheered the result, as this quality contractor was able to hold its ground in light of deteriorating conditions. But given the capital expenditure profiles of the major miners, I’m not sure the market will be as happy with the results of many other contractors in this space. While Forge Group is the first to call in the administrators this reporting season, the likes of UGL, Imdex, Bradken, Macmahon Holdings, Boom Logistics, Logicamms and Ausenco have all reported disappointing results for the six months to December 2013.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
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Paul Middleton
:
Interesting to see MND announce a $680m contract in the LNG space, almost doubling the new contracts from the last six months. Lesson : Extraordinary companies, even in the face of difficult industry dynamics, can remain extraordinary companies.
Roger Montgomery
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By definition good things tend happen to good businesses. Well spotted Paul.