MacMahon Holdings: Another company whacked

Miner cancels contract, as mining services companies feel more pain

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MacMahon Holdings (ASX:MAH) has had a $110 million contract with Glencore Xstrata terminated suddenly, as mining services becoming the whipping boys for the miners.

Around three weeks ago, chief executive Ross Carroll reaffirmed 2013 full year guidance of $85 million profit before tax, saying the company's strong future performance would be underpinned by its $3.5 billion order book, $2.5 billion tendering pipeline and a client base of major international mining companies.

MacMahon and its shareholders have just found out how concrete that order book and project pipeline really is. The cancelled project was expected to bring in $6 million of revenues this financial year and $80 million in fiscal year 2014.

In the past month, we've seen a plethora of mining services companies announce deteriorating conditions, with cancelled or delay resources, energy and infrastructure projects. Coffey International Ltd (ASX:COF) announced in early May that it had seen 54 projects cancelled or delayed in the previous six weeks alone. A week later, temporary accommodation builder Fleetwood Corporation (ASX:FWD) announced that an oversupply of accommodation and the softening resources sector would result in second half earnings falling.

In April this year, Ausdrill Limited (ASX:ASL) and Emeco Holdings (ASX:EHL) were among the mining services companies to announce downgrades. Several mining services companies yet to release an earnings update are among the most shorted stocks on the ASX, with expectations that forecasts will be downgraded.

The concern for shareholders in mining services stocks is that the pool of available contract work is rapidly drying up, and order books and tender pipelines aren't worth all that much, when projects can be cancelled at a moment's notice.

Foolish takeaway

Like a game of musical chairs, the music hasn't yet stopped, but several chairs have already been removed, with more still to be taken away. Some mining services companies may not find a chair to sit on, while those left over will likely have to make do with getting a portion of a seat. Companies in this sector may look cheap, but they look cheap for a reason.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned.

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