With expansion work in the mining sector slowing down at a decidedly fast rate, financial firm EY- a rebranded Ernst & Young- has released research that shows the value of Australian listed mining services companies has declined by a total of $12 billion in six months, and that figure is expected to increase in the next half as companies move to boost productivity in the face of continued slowdown in mining investment.
EY expects more receiverships and distressed sales to ensue in the absence of proactive consolidation measures across the sector, with mining companies either delaying and suspending expansion or shifting their focus from construction to production.
Just under half of Australia’s 84 listed mining service focused companies have lowered their profit guidance in the first six months of the calendar year. Total market capitalisation of the companies has tumbled 16 per cent in the period, giving the mining services sector an overall value just shy of $64 billion. EY Oceania corporate restructuring leader Vince Smith says:
"The reasons behind the downgrades come as no surprise, with the most cited primary reason being deteriorating market conditions, followed by impairment of assets and deferral of projects."
The hard times for mining services companies are compounded by the decision making of miners who are forced to juggle the expectations of myriad shareholders with the erratic nature of the sector. EY’s head of global mining and metals, Mike Elliot, summarises the recent evolution of strategic decision making in the mining sector:
“CEO’s and boards today are protecting returns and managing the interests of varied and often competing stakeholders. This is in stark contrast to just 12 to 18 months ago when fast tracking production and capacity constraints were top of the agenda.”
EY believes mining services companies with a diversified business offering are the best positioned to weather ongoing downturn. With roughly a quarter of all mine contracts due for renewal in 2013 and the shifted focus of miners taking shape, businesses with the capacity to both diversify and improve productivity will find themselves well placed to survive and hopefully thrive again. There will be some repairing to be done before then though, as debt levels in the sector currently sit at their worst ever levels, with the current debt to book equity ratio close to 50 per cent.
Commentary
FNN asked St George Chief Economist Hans Kunnen for his view on the direction of mining companies, who have touted a shift away from a predominant China-centric focus.
“I think it’s diversification, there are opportunities elsewhere. I think China will grow for decades, their demand will be strong. Maybe not at the same pace as in the previous five or six years, but you’ve got markets in Africa, Indonesia, Brazil; you’ve got other places that have strong minerals. They’ll have growing demand over time as well, it just makes sense, but I don’t think they’re focus is going to shift totally away from China, it will be an important player.”
Next stop... controversy in the Pilbara
Brockman Mining Limited
(ASX:BCK) has entered into a non-binding agreement with Flinders Mines Limited
(ASX:FMS) to pool infrastructure and transportation costs for its iron ore projects in east Pilbara. Their memorandum of understanding comes after Fortescue Metals Group Limited
(ASX:FMG) chief Nev Power warned the juniors to negotiate with him over access instead of using regulatory channels.
Meanwhile...
Fortescue Metals Group Limited
(ASX:FMG) has hit out against Brockman's attempt to build an independent rail line, saying there was no logical basis for the move. In a submission to Western Australia's Economic Regulation Authority, Fortescue said there was no capacity available to Brockman on the railway. The miner also says opening its rail line to Brockman - which is seeking annual shipping capacity of up to 20 mega tonnes - was not in the public interest, would not increase competition in the highly-fragmented iron ore market and would result in the inefficient use of the railway.
BC Iron Limited
(ASX:BCI) also questioned the plans of Brockman Mining Limited
(ASX:BCK) and Aurizon Holdings Limited
(ASX:AZJ) to build the new Pilbara rail line. The junior iron ore miner questions whether the line can be built without broader support from miners.
Atlas Iron Limited
(ASX:AGO) says recent agreements between small iron ore players in the Pilbara has strengthened its ability to secure a deal to transport its iron ore. Atlas Iron chairman David Flanagan says deals such as those involving Brockman, Flinders Mines and Aurizon have opened-up opportunities for Atlas to find third-party infrastructure opportunities.
Other mining morsels
Alumina Limited
(ASX:AWC) partner Alcoa has posted a sharp loss in the second quarter on restructuring costs but says the global outlook for aluminium is positive.
Santos Limited
(ASX:STO) and Drillsearch Energy Limited
(ASX:DLS) have formed a joint venture to fast-track the Western Cooper Wet Gas Project.
BHP Billiton Limited
(ASX:BHP) has increased its stake and taken operatorship of a petroleum exploration project in Western Australia's Carnarvon Basin, formerly run by a Woodside Petroleum Limited
(ASX:WPL) subsidiary.
Arrium Limited
(ASX:ARI) will take another $480 million hit as part of its restructure, as the company's efforts to streamline its steel and recycling operations incur further costs.
Rio Tinto Limited
(ASX:RIO) has the all clear from Mongolia to begin shipments from its Oyu Tolgoi copper mine and has this week launched its first shipment of copper concentrate.
Yancoal Australia’s Limited
(ASX:YAL) Chinese parent company Yanzhou Coal Mining Coal says it may privatise its underperforming ASX-listed subsidiary, a year after floating it.
By Joel Spreadborough
