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Macmahon Holdings Limited soars higher: Is it a buy?

Rocket liftoff

Shares of Macmahon Holdings Limited (ASX: MAH) surged as much as 56.5% today, hitting a high of 7.2 cents after the company announced the sale of its Mongolian operations.

Macmahon, which is a struggling mining services business, sold the Mongolian business to an unnamed buyer for a total of US$65 million (approx. $85 million), thus ridding itself of the burden of a 10-month dispute on the contract with Erdenes Tavan Tolgoi LLC regarding payment delays. The company said that it will now exit that contract while the buyer will manage that dispute moving forward.

The sale is also expected to net the company US$62 million, putting Macmahon in a net cash position which chairman Jim Walker described as a ‘milestone in the transformation’ of the business.

Investors will certainly be pleased with the result, given that the company reported an impairment charge of up to $125 million earlier this week relating to its equipment and inventory values. That comes in addition to the $130 million impairment the company recorded in the first half.

Although the company is looking to improve its cost base and its overall competitiveness, Macmahon still represents a risky investment prospect. Mining companies such as BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) are increasingly taking their services in-house to save on outsider commissions, thus creating difficult trading conditions for businesses like Macmahon.

Although some mining services businesses will likely survive, and potentially even thrive, picking the winners requires a lot of guesswork which can be a huge risk to your overall wealth. As such, investors would be wise to avoid the sector altogether and focus on some of the market’s more promising opportunities.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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