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Forge Group loses $290 million contract

Engineer and construction group Forge Group (ASX: FGE) last week notified shareholders of the loss of a $290 million contract with Chinese-controlled miner MMG. MMG terminated the engineering, procurement and construction contract for a zinc-lead-silver processor at Dugald River, located near Mt Isa in northwest Queensland.

Forge said the cancellation would have minimal impact on the company’s earnings and revenue in 2013 and 2014 as the majority of work was due to occur in 2015. In a company statement, managing director David Simpson said, “Whilst this decision is regrettable, Forge Group has been very successful in strengthening its work in hand with almost $1.6 billion worth of new projects awarded in the last month”.

So far this financial year Forge has been awarded two sizeable contracts, a $100 million project with Rio Tinto’s (ASX: RIO) Yandi Sustaining Project in Newman, Western Australia, and $800 million of a $1.47 billion project with the Roy Hill iron ore mine also in Western Australia.

Before this setback, Forge had an order book in excess of $2.2 billion, indicating that the order book now sites at around $1.9 billion.

Forge was one of only a handful of mining services companies to announce strong rises in profit and revenue in 2012-2013, reporting a 36% rise in earnings to $1.1 billion, and a 28% rise in profit to $62.9 million. The company had a strong cash position at the end of the 2013, with over $103 million held to be used to pursue growth opportunities.

Foolish takeaway

Forge’s strong reputation in the mining industry is ensuring that the company continues to be awarded small to medium sized contracts, however the slowdown mining capital expenditure will no doubt affect it from time to time. Assuming Forge maintains its current contracts and executes them successfully, it is well placed to outperform its peers and register solid share price growth in the coming year.

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Motley Fool contributor Andrew Mudie does not own shares in any of the companies mentioned.

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