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Why Coffey fell more than 40%

Coffey International Ltd (ASX: COF) has seen its shares fall more than 40%, after the company announced that the continued contraction in the resources sector would hit its earnings. Coffey said it was cutting its final dividend and faced significant restructuring costs of up to $10 million with up to 150 staff made redundant.

Coffey is a specialised mining services company, offering consulting, environmental and technical services, predominantly to the resources industry, but also to the Infrastructure and Oil & Gas industries. In the past six weeks alone, the company has seen 54 contracted geosciences projects delayed or cancelled.

The chart below shows the stark contrast Coffey is facing compared to previous years.

Coffey projects cancelled

Source: Coffey Announcement

The chart is evidence that mining capital expenditure is falling rapidly, and has implications for other mining services companies, such as ALS Limited (ASX: ALQ), Monadelphous Group (ASX: MND) and Ausdrill Limited (ASX: ASL).

As the resource companies cut back on their capital expenditure, mining services face the prospect of cutting their profit margins, dropping staff and significantly lower earnings – and that’s just so they survive. With a smaller pool of projects, it’s a bit like musical chairs. When the music stops, there won’t be enough seats for all mining services companies. Some will be forced to exit the industry, with those with high levels of debt and low cash flows most at risk.

ALS Limited, ex-Campbell Brothers, which provides testing and inspection services, mainly to the mining and mineral exploration industry, has already warned that volumes are expected to fall. The company is due to report its full year results towards the end of this month, but it wouldn’t surprise to see the company disappoint the market.

Foolish takeaway

While we’ve seen several mining services companies already report falling work in hand, and an increasingly opaque future, Coffey’s result could be an indication of what’s to come. Several mining services stocks may look cheap now, but there’s a big chance several of them will end up much cheaper, and in a worst case scenario, some may no longer exist.

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