Are mining services companies ready for a turnaround?

Investors should be careful investing in iron-ore exposed contractors

It’s been a fairly average 12 months for Australia’s mining services companies. The peak of the mining construction boom appears to have passed, and while construction is still underway at some big coal mines and LNG projects, and the Gina Rinehart Roy Hill project, the negotiations are now weighted in favour of the mining companies, rather than the supply companies.

Gone are the days of BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) being forced to negotiate with equipment suppliers who had too many orders and not enough equipment, or contractors who wouldn’t get out of bed for a few hundred dollars an hour. The equipment of drilling companies and staff of contracting companies are now gathering dust, under-utilised with little prospect of a near-term pickup.

Or at least that’s what the recent earnings reports from Australia’s major mining services companies would have you believe. A quick survey of around 10 services companies to have reported in the last month revealed an average drop in revenue of around 30%. Similar numbers have been experienced in the profit column too, which is at least a positive that costs are coming out as revenue is falling.

The biggest names, including WorleyParsons Limited (ASX: WOR), Monadelphous Group Limited (ASX: MND) and Bradken Limited (ASX: BKN) have seen their share prices fall by over 30% in the past year as work dried up. Smaller names have fared even worse, NRW Holding Limited (ASX: NWH), Austin Engineering Ltd (ASX: ANG) and Logicamms Limited (ASX: LCM) have all fallen around 40% over the same period, while Forge Group has collapsed entirely.

But could this be the bottom?

I personally doubt that this will be the lowest point for many mining contractors. Outlook statements generally set a sombre tone for the rest of the year, with further degradation in revenue expected and dividend payouts falling from boom-time highs.

Contract award announcements appear to be few and far between recently, with many contractors noting that it is unlikely to pickup in the first half of CY 2014.

Foolish takeaway

The future is uncertain for many mining contractors. Those traditionally associated with iron ore and coal mines appear to be struggling the most, while companies exposed to the growing LNG sector appear to be seeing reasonable demand. Investors looking for mining exposure would be best placed looking at the major producers or perhaps smaller names working in a niche, such as waste removal company Tox Free Solutions Limited (ASX: TOX).

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

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