MENU

Collateral damage as the boom ends

The fallout over cancelled, cut-down or postponed mining resources projects has seen many of the mining services companies’ shares suffer large falls. We’ve already seen drilling supplier Boart Longyear shares fall 46% in the last few days.

Fortescue Metals announcement yesterday that it was cutting back its infrastructure spend appears to have direct consequences for Downer EDI Limited (ASX: DOW), which provides contract mining services at the Cloudbreak mine, according to a report in today’s Australian Financial Review. The company’s Christmas Creek mine is also likely to come under scrutiny, where Downer and NRW Holdings Limited (ASX: NWH) are operating.

Mineral Resources Limited (ASX: MIN), which provides mining services for both mines could be affected as well. Leighton Holdings Limited (ASX: LEI) was named as preferred tenderer to provide contract mining services at Fortescue’s Solomon hub, but has yet to sign a contract.

The market appears to be expecting the worst, with Downer and Leighton’s shares down 12% over the last five days, while Mineral Resources fell 18% and NRW Holdings’ shares have lost 17%.

In reality though, mining services companies are unlikely to see their revenues fall as much as the market may be suggesting – at least in the short-term. Some contracts will already be signed, so work may still go ahead, while cancelled contracts could see the miners forced to pay them out.

Many miners have also complained that they were struggling to get enough skilled employees, and this may alleviate the problem. For the mining services companies themselves, there may even be an advantage. Instead of working on several projects at once, they may be able to work on fewer, but string some together sequentially, extending their revenue certainty out further than they currently have. In other words, revenues might fall, but the companies will have a better idea of their future projects and cash flows.

The Foolish bottom line

Not all mining services perform the same services for the same clients, but the market doesn’t appear to have taken that into account. Companies servicing the oil and gas or infrastructure sectors may be able to increase their revenues and profits over the next few years, while some have other divisions besides mining services. There could be some opportunities for investors in the sector, for those prepared to do some research.

If you’re in the market for some high yielding ASX shares, look no further than our “Secure Your Future with 3 Rock-Solid Dividend Stocks” report. In this free report, we’ve put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.

More reading

Motley Fool writer/analyst Mike King owns shares in Leightons. 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.

The 5 mining stocks we’re recommending in 2019…

For decades, Australian mining companies have minted money for individual investors like you and me. But if you believe the pundits and talking heads on TV, those days are long gone. Finito! Behind us forever…

We say nothing could be further from the truth. To earn the really massive returns, you’ve got to fish where others aren’t fishing—and the mining sector could be primed for a resurgence. That’s why top Motley Fool analysts just revealed their exciting new research on 5 ASX miners they believe could help you profit in 2019 and beyond…

Including:

The best way we see to play the global zinc shortage… Our #1 favourite large-cap miner (hint: it’s not BHP)… one early-stage gold miner we think could hit the motherlode… Plus two more surprising companies you probably haven’t heard of yet!

For free access to our brand-new research, simply click here or the link below. But be warned, this research is available free for a limited time only, and we reserve the right to withdraw it at any time.

Click here for your FREE report!