BHP to automate iron ore operations

In a further attempt to rein in soaring costs, BHP Billiton (ASX:BHP) is accelerating the modernisation of its Pilbara iron ore division to cut contracting costs.

The world’s largest miner will open a high-tech remote operating centre in Perth today, as it plays catch up to fellow iron ore miner Rio Tinto Limited (ASX:RIO). Rio already operates a remote operations centre, controlling amongst other things, driverless trucks at its iron ore mines in the Pilbara.

BHP is also rumoured to be taking some contracting work in house, in another blow to the mining services industry. That is already happening in the coal industry, with BHP, Xstrata and other miners taking over some of the work previously done by external contractors.

With the resources boom coming to a close, equipment suppliers are being forced to drop prices and cut their margins. Last week we saw Seven Group Holdings (ASX:SVW) report that its Westrac division had been forced to undertake a restructure, as a result of challenging market conditions with 350 redundancies at a cost of $10 million. Westrac owns the contract to supply Caterpillar trucks and mining equipment in NSW and the ACT, as well as Western Australia.

The bad news just keeps coming for mining services companies, and its likely we’ll see more profit downgrades from many in the sector in the near future. Yesterday, drilling contractor Boart Longyear (ASX:BLY) announced its second profit warning in just two months.

As the mining boom expanded over the past decade or so, miners were more focused on increasing production and growth, and less so on keeping costs under control. That focus has now turned around, and the focus is on making operations as efficient as possible, cutting back on capital expenditure and exploration, leaving mining services companies out in the cold.

Foolish takeaway

While most mining services companies look cheap on many fronts, they are likely to be value traps, and Foolish investors would be wise to stand back and watch the drama unfold from the sidelines.

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

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