In case you missed the memo, now is not a good time to buy mining services companies.
With investment in the sector still sinking like a stone, weaker commodity prices are worsening the situation by causing miners to defer works for better times in order to save capital.
This creates nothing short of a nightmare for companies like Ausdrill Limited (ASX: ASL), whose share price has dropped 50% since the start of the year and 66% from recent highs.
The collapse of Western Desert Resources left the company with a huge hole in revenue back in September, while a trading halt in October saw a further earnings decline.
Shareholders have been dealt another blow this week after Syama Resources announced its plans to defer expansion works at its sulphide pit – a deferral that is estimated to cost Ausdrill another US$3.5 million in lost revenue every month for the next eight months.
The truly difficult part is that despite management's attempts to lower costs and improve efficiency, Ausdrill is entirely at the mercy of the market and the decision to defer contracts is not necessarily one that can be foreseen.
For buyers of mining services companies I imagine it's kind of like running through a swamp blindfolded – at any moment you could stumble into a pit filled with quicksand, but you won't know it until you're in it – and by then it's too late.
Nor is Ausdrill's situation unique, with recent sharp falls also experienced by services companies WDS Limited (ASX: WDS), Titan Energy Services Limited (ASX: TTN), and Boart Longyear Ltd (ASX: BLY) – down 43%, 90%, and 65% respectively.
Even giant Monadelphous Group Limited (ASX: MND) has been smashed this year, losing 45% of its share value; and one Foolish writer thinks that the worst could be yet to come.
Curiously, analyst Morningstar has a price target of $13 on Monadelphous.
However with so much negativity in the sector and continuously falling mining investment, are you really willing to take that risk?
