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