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Mining services: Sorting the good from the bad

The coal industry has always fluctuated between booms and busts, but the recent downturn in mining has forced some tough decisions to be made.

Queensland Resources Council (QRC) says that over a dozen coal projects, representing about $50 billion, have been put on hold or cancelled. The last 12 months have been extremely difficult for Queensland business owners who provide various forms of support for the mining industry but this time it could be worse than normal.

Phones have gone quiet for many companies that have had to endure a rapid turnaround from boom to bust. QRC chief executive, Michael Roche, says “there’s no getting around the fact that [this] is probably the most difficult conditions for the coal industry in the last 10 years. We’ve seen coal prices plummet at a time when costs have been skyrocketing, and so there are many mines that are in loss-making situations.”

Over 7,000 jobs have been cut across Queensland and Tony Caruso, CEO of Mastermyne Group, says “we know that it’s not all good news for the iron ore industry and the gold industry. There are pressures there and so cost-cutting is not uniquely a Queensland phenomenon.”

In recent weeks, mining services company Downer EDI (ASX: DOW) cut 185 jobs at its Goonyella Riversdale coal mine in central Queensland. It followed massive cuts from mining giants Peabody Energy (NYSE: BTU) and Glencore Xstrata last month.

However Tim Miles, chairman of the Mackay Chamber of Commerce, says it’s not all doom and gloom. He says mining businesses “need to look at reducing labour costs and that actually means reducing wages”. Once mining services and smaller miners can begin to run more efficiently, they will make extremely attractive investment opportunities when the commodity prices return.

One of Australia’s largest mining services contractors has been bouncing back from recent lows as investors have seen the potential for its diversified business model. Leighton Holdings (ASX: LEI) has been through a rough patch in recent years because it struggled with cost overruns of massive projects, including Victoria’s Desalination plant and Brisbane’s Airport Link.

Foolish takeaway

Some of the ASX’s most shorted stocks include many in the coal, mining services and resources sectors. Investors should be sure to do their due diligence on the company, particularly its ability to sustain low prices for an extended period of time. Predicting peaks and troughs of both stocks and commodities is impossible so perhaps the best thing to do may be to wait for a solid kick in prices before even contemplating a return to the sector. Patience won’t lose you money.

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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.  

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