Is the boom over?

Tough times may be ahead for resources and mining services companies

Conflicting reports from mining contractors and miners alike, suggest the boom may be over in some sectors of the resources industry.

UGL Limited’s (ASX: UGL) share price fell more than 10% yesterday as the CEO declared the boom over and worrying signs ahead.  UGL chief Richard Leupen said “The top of the resources sector has passed us and the momentum is now slowing, not accelerating.”

Work-in-hand for the company’s resources division has fallen 16%, from $1 billion to $800 million, while sales fell 11%.

In complete contrast, Downer EDI Mining (ASX: DOW) increased its mining division’s revenues from $1.5 in 2011 to $2.5 billion in 2012, a jump of 68%, although the company is exposed to one customer that provided a scary one third of revenue in the 2012 financial year. The company also said that it was seeing continuing growth of mining services. Downer’s chief executive Grant Fenn said;

“In the resources industry, we’ve seen little that’s been turned off, but we have seen deferred tender awards.”

BHP Billiton Limited (ASX: BHP) chairman, Jac Nasser isn’t so sure, recently made the point that,

The tailwind of high commodity prices has contributed to record growth in the sector and the country. Now we have a period where those tailwinds are moderating, and we expect further easing over time. The resources business has always been, and always will be, a cyclical business.”

In a reflection of the chairman’s statement, BHP has put on hold all approval for all major projects until December 2012, while its $20 billion Olympic Dam expansion looks likely to be postponed, and its $20 billion Port Hedland expansion also appears increasingly unlikely to go ahead in the short-term.

Rio Tinto Limited (ASX: RIO) on the other hand is committed to its iron ore expansion, planning to spend US$16 billion in capital expenditure this financial year. But the company has one eye on the rest of the world, with chief executive Tom Albanese saying,

“Global economic conditions and sentiment dropped markedly in the second quarter. We are keeping a close eye on the pace of the US recovery, the continuing eurozone crisis and the impact of efforts to stimulate the Chinese economy on the markets that we serve.”

The big miner is also weighing up its investment in coal, with two projects worth $3.5 billion combined likely to be delayed.

The Foolish bottom line

It appears that there are parts of the resources industry that are still doing well, and expectations are high, while other parts are doing it tough and expectations are that it will get tougher.

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Motley Fool writer/analyst Mike King owns shares in BHP. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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