Mining services not out of the woods

Spending on exploration is falling, and forecast to fall further – which has implications for companies servicing the resources industry

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Exploration expenditure in Australia is expected to peak in 2013, according to the Reserve Bank – but judging by data from the Australian Bureau of Statistics (ABS), it may have already peaked in the December 2011 quarter.

ABS Mineral Exploration

Source: ABS Mineral and Petroleum Exploration September 2012

In a further sign of falling spending, Rio Tinto Limited (ASX: RIO) has just announced that it is cutting its spend on exploration by $750 million in 2013, compared to the previous year. The Centre for Exploration Targeting believes that Australian spending on exploration may be entering a period of contraction. We could see the downward trend continue, without any real recovery, such as the one we saw in 2009.

That has major consequences for several mining services companies. We’ve already seen drilling products and services firm, Boart Longyear (ASX: BLY), issue two profit warnings, amid downgrades to its forecasts for the 2013 and 2014 financial years. At the forefront of falling exploration expenditure, its perhaps no surprise that Boart was one of the first to be hit.

Testing and inspection company, ALS Limited (ASX: ALQ), which relies to a large extent on exploration, recently reported that geochemical flows in to the company’s laboratories had been in decline for a number of months. While the company expects a turnaround later this year, it clarified that comment with “although this remains difficult to predict at this stage”. It seems the company has more hope than faith in the turnaround, and could be in for a nasty surprise.

Construction and project management, procurement and engineering companies will also likely be hit next as exploration expenditure falls reducing new finds and extensions to existing mines. In the short-term, mining blasting, haulage and crushing services will likely still be in high demand as miners ramp up production to fill in for lower commodity prices. Those services companies that provide pure production services, like MacMahon Holdings (ASX: MAH) should be fine if that is the case.

That is….until commodity prices fall.

Current iron ore prices are unlikely to be sustained, and most analysts are forecasting lower prices in the future.

Over the longer term, many mining services companies will struggle as miners then start to cut back on production, to cut supply, and wait for an increase in commodity prices. After all, this is a cyclical industry. Miners try to increase supply as demand increases, but at some stage, supply outweighs demand, which forces commodity prices to fall, and then supply tends to decrease.

Foolish takeaway

Mining services is a risky sector to invest in given the current trends.

Companies not solely restricted to the resources sector would likely be the better picks. Those with exposure to government construction and infrastructure projects as well as those with exposure to the oil and gas sectors, will likely do ok. With $160 billion of LNG plants alone under construction, and potentially more to come, such as Woodside Petroleum’s (ASX: WPL) Browse and Sunrise projects, companies servicing the oil and gas sectors should be able to secure contracts, grow earnings and see their share prices respond accordingly.

Oil, copper, and gold continue to be in high-demand — and their popularity doesn’t look to be slowing. We’ve uncovered three companies poised to benefit from the rising prices of these commodities. Get our brand-new report — “3 High-Risk/High-Reward Resources Stocks” — FREE!

More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, 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.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King owns shares in Woodside Petroleum.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

asx share price competitions represented by businessmen arm wrestling
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

person reading news on mobile phone
⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »