MENU

Boart Longyear: Mining conditions toughest in decades

Boart Longyear’s (ASX: BLY) boss Richard O’Brien has stated that the last six months in the mining sector have been the toughest he has experienced in the last 25 years and suggested that the industry could remain in cost-cutting mode for a further two years.

As a mining services company, Boart has been heavily exposed to the effects of reduced exploration spending, whereby mining companies over the world have cut unnecessary capital spending and sold or closed underperforming mines to instead focus on long-term sustainability. Mining giants BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) have both dramatically cut their costs and have said no to spending more on various projects.

However, although conditions have been poor, O’Brien believes the grass will be greener in years to come, suggesting that the pace of the decline in resources spending will slow down in 2014-15.

While it was difficult to forecast for 2015-16, he conceded that miners cannot simply tighten their spending indefinitely. O’Brien said, “I just don’t think you can have three years in a row of 25 to 30 per cent cost reduction in mining companies. They need to replace their reserves. A couple of years out, people are going to need to start spending more money.”

To highlight the pain felt by Boart since the beginning of the mining downturn, the company’s shares peaked at $4.89 in 2011, which gave Boart a market capitalisation of $2.3 billion. Now, shares are trading for just 46c and the market capitalisation is $208 million. This represents a 90.6% fall in share price in the last two years.

However, whilst O’Brien may be confident that things will pick up in the next year or two, some analysts do not share the same belief. Moelis & Co analyst Adam Mitchell believes that the market recovery could still be several years away, and that the cycle’s turn would largely depend on the gold price, “given that gold is 40-50% of the global minerals exploration market.”

Foolish takeaway

In order to fight the weaknesses facing the sector, Boart hopes to have cut $650 million in costs and reduced headcount by 5400, which should be reflected in earnings from December this year.

Boart might appear cheap, but the industry is certainly volatile, meaning that it might be wise to look elsewhere for investment ideas. For instance, are you interested in our #1 dividend-paying stock? Discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

More reading


Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

5 ASX Stocks for Building Wealth After 50

I just read that Warren Buffett, the world’s best investor, made over 99% of his massive fortune after his 50th birthday.

It just goes to show you… it’s never too late to start securing your financial future.

And Motley Fool Chief Investment Advisor Scott Phillips just released a brand-new report that reveals five of our favourite ASX stocks for building wealth after 50.

– Each company boasts strong growth prospects over the next 3 to 5 years…

– Most importantly each pays a generous dividend, fully franked.

Simply click here to find out how you can claim your FREE copy of “5 ASX Stocks for Building Wealth After 50.”

See the stocks now