Why Boart Longyear Ltd is heading for the scrap heap

Creditors may be about to take control of the company

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Drilling services and equipment provider Boart Longyear Ltd (ASX: BLY) looks to be heading into administration, thanks to the company's enormous debt load.

If ever there was another reason why investors should treat companies with large levels of debt with a great deal of caution, Boart is it.

As global exploration spending virtually halved in the two years since 2012, so do did Boart's revenues. In 2012, the company reported just over US$2 billion in revenues – last year the group saw revenues of just US$1.2 billion. Drilling products' orders have dropped dramatically and utilisation rates have fallen to less than 30%, forcing Boart to slash its workforce from over 11,000 staff to around 5,600 by the end of 2013.

The company reported a massive loss of US$620 million last financial year, including US$461 million in restructuring charges. Boart still had US$526 million in net debt at the end of 2013, and a strategic review aimed at turning around the driller's performance appears to have ground to a halt, according to the Australian Financial Review (AFR).

The newspaper reports that potential suitors have been scared off by the large debt load, which exceeds the value of equity. Now the AFR reports that creditors including LA-based private equity firm Ares Management, are likely to gain control of the company. That could see the company delisted from the ASX.

Boart is not be the only mining services company peering over the cliff. Ausdrill Limited (ASX: ASL) has seen its share price crash by 61% since 2007, MacMahon Holdings Limited (ASX: MAH) is down 70% since 2009, while Emeco Holdings Limited (ASX: EHL) has lost 50% over the same period.

And Boart may not be the only one headed into history, with global mining investment spend still falling at a rate of knots, so we are far away from the bottom and any sort of recovery in the sector. Boart may look cheap, but there's a high risk it could go to zero. Investors looking for a company paying a decent dividend yield, with plenty of potential growth should check out this report…

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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