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Unearthing informed Mining Services research

Unearthing informed Mining Services research

Although it has taken a while for our alert earlier this year to flow through, project delays, cancellations and profit downgrades are mounting as the mining services sector confronts its post-capex-boom. To name a few: Macmahon is shedding staff and cutting pay rates, Emeco’s hiring rates have collapsed with an industry wide surplus of idle heavy machinery, Diploma Group is no longer proceeding to build a 244 man camp near Tom Price for Rio Tinto, ALS is reporting no growth, Ausdrill severed its earnings guidance and Orica wrote down the value of its equipment finance division, Minova, by $367m.

While there are a few brights spots in the sector, Monadelphous for one, in general we remain extremely cautious about the prospects for most. In our opinion the recent downgrades are just the tip of the iceberg. For some reason, known only to them, analysts covering the sector are behaving like deer caught in headlights, choosing only to report on downgrades as the company makes the announcement. This is not research.

We find it strange that rather than being pro-active and conservative with their assumptions, in a clearly contracting market space, they continue to have hockey stick forecasts for future earnings. Are they choosing instead to huddle together for fear of moving first or being dumped by the corporate clients they represent?

We firmly believe that estimates are not adequately capturing the decline we are witnessing across the board in mining services. So we urge you to be careful when taking ‘advice’ on the back of current mining service sector ‘research’.

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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7 Comments

  1. Risk is everywhere in the market now. Mining services and resources are near the top of the pile. Banks, Telstra and the like are overpriced and will get more so as the biggest retirement boom in history gets under way now that baby boomers are all looking for safe places to park money. Hybrids, risky as they are, are mostly at a premium to face value, which means you are voluntarily buying some of your first year’s interest entitlement just to own them! How absurd is that! That makes as much sense as paying Woolworths $10,000 to give you a job as a checkout operator! Term deposits are low and heading south as (I believe) Wall Street plans to unleash its next big market surprise (a plunge) so the poor and the investor can take another haircut while the short sellers and other clever dicks get even richer.Usually an optimist, I have never before felt such a clear sense of danger as I do right now. Nothing but the very highest crash-protected investments make any sense at all. Things like CSL and COH look very good, but where does one get income with safety? It’s a mystery! And PLEASE! I spent 45 years in the property business. Watch out you would-be REIT investors. Woolworths couldn’t sell its second-tier retail freeholds so they wrap them into a trust, and suddenly everyone wants to own them! Do these folk read about the emergence of internet- based marketing and the gradual demise of bricks and mortar retailing? Many of these specialist shop secondary tenancies are unsustainable in the short to medium term. And Woolies won’t even pay an increased rent for 5 years. What happens then to your shareholding? Why do you think Myer sold its flagship store before its IPO? Who’s next to bail out of retail property? Gerry Harvey perhaps? Guys it’s time to keep belts tight, heads level and powder dry.

  2. Hi Roger,
    The mining services sector relies on continued growth in mining . As you already know, South Africa and South America competes with Australia for mining products from china. Since USA is the largest consumer/customer of China, it has a large impact on the economic performane of China. I just happen to run a scan on USA companies, and decided to look at those that have trading volume greater than 5M per day, the scan produced about 360 companies. I looked at each of these companies on a weekly chart to identify the general trend. To my dissapointment many were trending sideways but most heading south. there was only one or two companies that I considered worthy of purchase. As you know a company with continued EPS growth and improving profits is normally illustrated with a chart profile heading to the upside, like ARP, GEM, CCP etc. But the USA charts I looked at did not reflect this, and my assumption is that the economy struggling and is not good for China and our mining services sector.

    Regards Vic

  3. I think that one shouldnt be overly pessimistic about mining services companies as there is still a huge amount of Capex in Australia.
    Further with the US intent on printing money for however long it takes to get their economy going this has surely got to be a bonus for both commodity prices and for some mining services companies.
    Additionally less Capex in the short term may put a break on wages which are biggest impactor on mining services businesses.
    Further a lot of the marginal and poor performers will either go bust or become uncompetitive leaving more work for the good performers.

    There will be a time when there are some real bargains amongst the mining services companies as the whole sector is marked down regardless of the fundamentals of the individual company.

    I am still holding FGE and there are some others around like MND that should hold up in the long run.

  4. And so yet another sector burns investors; aided and abetted by the experts. Where to put one’s money if you think as I do that the australian economy will inevitably follow the rest of the world down over the next couple of years? The better quality REITs appear to be a sector worth some allocation particularly as interest rates are bound to head down further if my prognosis for the economy is correct.

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