THE spotlight has swung firmly onto mining services companies after Macmahon Holdings requested a trading halt in preparation for a downgrade on the bullish 20 per cent increase in profit guidance that it issued last month.
The board will meet today to discuss the impact on profit guidance of one particular project and the outlook for $4.1 billion in construction projects under tender, given a number of major mining projects, including Gina Rinehart’s $10 billion Roy Hill iron ore project, will potentially be delayed until conditions stabilise.
Almost 25 per cent of Macmahon’s client base is government-related, and as resources companies are
making decisions to delay projects, governments are reducing their infrastructure work.
The issue for mining services companies is that when projects are put on hold, even for a short time, the pricing on the contracts will be reset, which means there will be an inevitable crunch on profit margins.
Macmahon is not alone. Others in the sector – including Ausdrill, Boart Longyear, NRW Holdings, UGL, Bradken, Emeco and Sedgman – have seen their shares decimated in the past few weeks as investors dumped stock in preparation for the loss of future projects. Not surprisingly, hedge funds have targeted the sector.
Construction giant Leighton Holdings was the exception yesterday, standing out like a beacon as its shares surged more than 8 per cent on rumours that French-based construction group Vinci SA was toying with the idea of making a bid for Leighton’s major shareholder, Germany’s Hochtief, or Hochtief’s major shareholder, Spain’s ACS, which would ultimately put Leighton in play. The speculation came from an interview with the boss of Vinci in a German edition of the Financial Times and was then picked up by Bloomberg and spread throughout the market.
The speculation was given added credence due to the debt-laden state of ACS, which is carrying more than €9 billion ($11 billion) of debt, and which recently sold some valuable assets to help pay down some of the debt. Since ACS bought into Hochtief, mainly to gain access to the jewel in the crown, Leighton, the Leighton operations have been a massive disappointment, both stock price wise, profit wise and from a capital perspective.
But the ownership structure is complicated and any takeover of Leighton would not be straightforward.
Meanwhile, it has taken the focus off Leighton’s exposure to the mining sector, as miners are being forced to reassess some of their projects and expansion plans in light of the uncertainty gripping China.
It might sound simplistic but miners have been caught out by the fact that costs remain too high at a time when commodity prices have been falling.
When commodity prices are rising, miners become production driven at any cost, and when commodity prices fall, the headroom closes between the cost of production and sale price, and resources companies become more cost and production driven. Mining services companies get caught in the crossfire with their work cut back and margins squeezed.
It is a situation that has been going on for months, but the hope has been that commodity prices would spike back up and China’s economic growth would spurt ahead.
Instead, volatility and uncertainty are featuring into the equation, forcing companies exposed to the mining sector to bring it to account now.
BHP Billiton opened the floodgates on what was going on when it finally announced it was mothballing two big projects, including the $30 billion Olympic Dam expansion. Then came Nathan Tinkler with reports of his various financial woes, and Fortescue Metals Group, which spooked the market two weeks ago when it pared back its expansion plans, sacked staff and announced the sale of one of its assets. Fortescue’s more recent revelations that it is in discussions with its key banks to allow a waiver of its debt covenants next year has done little to bolster confidence in the sector.
Last week, NRW Holdings went into a trading halt after Fortescue announced it had delayed its expansion plans. When it returned to trading, it revised down its revenue for 2013 and its growth prospects.
The world’s biggest drilling company, Boart Longyear, also warned it was revising down its earnings and revenue outlook.
The word is Fortescue’s banks will capitulate but will attach certain conditions on the iron ore miner, including agreements that it won’t pay dividends. It is also likely to announce an equity issue when its share price recovers to provide a buffer for the debt holders.
In the past few weeks, more and more mining companies have started to review projects with a view to putting some of them on hold until they can gauge what is going on in China. Rinehart’s Roy Hill iron ore project is being wound back and, last week, it was reported that it unofficially told some Early Contractor Involvement (ECI) clients to stop work. The ECIs have been bracing themselves for an official letter.
Meanwhile, everyone is watching and waiting for the next move, with China taking centre stage.
This story Administrator ready to work first appeared on Nanjing Night Net.