• I joined the 'Fear + Greed' podcast to bust the top five myths about private credit LISTEN NOW

A minefield for mining services investors

Energy / Resources | Comments (11)

A minefield for mining services investors

Things are looking tough for the Mining Services sector. Intense competition, falling revenue and lower margins were laid bare in the latest round of Annual General Meeting (AGM) presentations.

Remember, whilst there are about 70-80 listed businesses, we estimate there are at least 10 times this number in the unlisted space, all of which are clambering for an ever shrinking pool of work.

A barrage of weak first-half trading conditions, lower earnings, the hope of a turnaround in the June 2014 half-year, vague outlook statements, and a raft of earnings downgrades dominated the space.

Worley Parsons Limited (WOR), Ausenco Limited (AAX), Forge Group Limited (FGE), Ausdrill Limited (ASL) and Emeco Limited (EHL) represent a small section of businesses involved in many facets of servicing Australian miners from Engineering, Construction, Maintenance, Drilling and Equipment Hire – and all appear to be struggling.

While we know of a few businesses bucking the trend, they are the exception rather than the rule. The sector right now is akin to walking through a minefield.

And following on from Rio Tinto’s (ASX:RIO) statements this week, trying to sort the wheat from the chaff just got a little bit harder.

Combined with BHP Billiton Limited (ASX:BHP), these two mining behemoths make up around 40 per cent of all Australian mining capital expenditure. So when these powerhouses decide to turn their investing taps off, or even signal to the market that the taps will be gradually turned off in the future, ignore their guidance at your own peril. The following chart we think speaks volumes:

In the three years to 2015, RIO will have cut their budgeted CAPEX profile by a staggering 55 per cent. The implications of this should be fairly obvious – $9.6b in annual spend will be cut and the multiplier effect on those who service RIO will be profound.

If RIO has plans to heavily curtail their future investments, you can bet that others (including BHP) are following a similar path. A perfect storm for the mining service sector – given some second tier miners, such as Fortescue Metals Limited (FMG), have largely finished their expansion plans and are now shifting their focus to using cash flow to repay borrowings and reduce to more comfortable gearing levels.

With CAPEX reduced by the industry elephants, there is growing evidence that a period of rapid industry contraction and consolidation lies ahead. We expect the mining services sector to continue downgrading expectations. But when the dust settles, who will be left standing?

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.

INVEST WITH MONTGOMERY

Why every investor should read Roger’s book VALUE.ABLE

NOW FOR JUST $49.95

find out more

SUBSCRIBERS RECEIVE 20% OFF WHEN THEY SIGN UP

You are reading an article about: Energy / Resources

11 Comments

  1. margaret garrard
    :

    Hi Roger, have been watching Southern Cross Electrical (ASX:SXE) and interested whether you consider it to be one of the few in the sector to buck the trend

  2. Tony C
    :

    Hi Roger
    Thank you for your many warnings about the slowdown in the mining services sector and the value trap it posed. They were great company’s to buy when CAPEX spending was increasing and i opened a CFD account about a year ago for the purpose of shorting these once strong company’s which has worked well so far

  3. Michael Wang
    :

    After the shutting down of holden, and strangled Qantas, where the government will be looking for tax revenues to calm the market and preparing the newly unemployed workers? I guess the mining investment and production will be sustained by effort but through a very fine sieving process. In comparison of the hard effort put in Asia to develop the IT and efficiently scaled manufacturing industry, Australia will be finding it difficult to compete at least in the short run. The country needs to find its source of income to sustain the high standard of living either through debt or export.

  4. Matthew Tate
    :

    Despite the carnage there are a couple of mining service businees managing to do well, Titan Energy Services (ASX:TTN) have guided to yet another strong year of growth this year. I’ve continued to hold those and have just added some more in the recent pullback.

  5. Killian Harty
    :

    Very interesting article. I work in the industry in Perth and you’re not wrong. I’ve lived through the western worlds worst property crash in Ireland. It seems to me that Perth might be in store for something similar if these forecasts come to fruition. There are ads on the radio saying find $2000 dollars and we’ll find you a home. Median price house price just breached $500,000. Subprime mortgage crisis anyone? At least every second person here relies on a thriving mining industry for their income.

Post your comments