Contractors ready for turnaround

Higher commodity prices and investment to maintain iron ore volumes could help lift mining contractors out of the doldrums after several tough years.

An 80 per cent increase in the price of iron ore since February 2016 has energised the state’s mining contractors, amid expectations of an improving environment towards the end of this year.

That optimism follows a lean 2016, with only $3.4 billion of contracts identified by Business News as awarded over the year to February.

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• Smaller players seek to reduce freight barriers 
• Miners warm to HiSeis

This contrasts with $6.1 billion of contracts awarded in the six months to December 2012, according to Department of Commerce data.

BGC Contracting chief executive Greg Heylen said a continued strong iron ore price could lead to a rapid uplift in the market in the next six to 12 months.

“We are almost at that inflection point where demand is about to take over from supply, and then we’ll have a fundamentally different market,” Mr Heylen told Business News.

“One of the features of the downturn in the market for the past two or three years is that clients haven’t really been maintaining their assets, because they wanted to lower their costs.

“Now that the market is starting to improve and those assets really do need some maintenance, we are seeing increasing demand for facilities maintenance.”

That demand led BGC to recently acquire DIAB Engineering, a mining project construction, operations and manufacturing business based in Geraldton, Mr Heylen said.

Also predicting an improvment was transport and logistics company Bis Industries chief executive, Brad Rogers, who said it had been a tough couple of years in the sector, with the recent rise in commodity prices providing an unexpected boost.

He said that was yet to pull through to increased demand for contractors, however.

As stronger sentiment converted to investment decisions, Mr Rogers predicted a tentative improvement over the course in 2017 and a real pickup to happen in 12 to 18 months.

One of the most significant factors would be the need for capital investment among major miners to bring replacement tonnages on to the market as reserves in existing pits ran down, he said.

For Bis Industries, that would be an opportunity to increase its market share in terms of haulage, with replacement mines generally further from processing plants, thus requiring longer distances to be travelled.

Construction

Contractors focused on construction will also likely benefit as market conditions improve.

A handful of contracts were awarded last year in that regard, including Rio Tinto’s greenfields Silvergrass mine and brownfields Yandi Oxbow project.

More recently, Atlas Iron announced it would proceed with the $50 million Corunna Downs project next year as two operational mines close.

Katana Capital portfolio manager Romano Sala Tenna said BHP Billiton would also need to replace between 80 million tonnes and 90mt per annum of production in the next three or so years.

“We are seeing that we are at or near the bottom of the resources capex cycle, we don’t see it getting any worse,” Mr Sala Tenna told Business News.

“We think share prices have already factored in a turn in the cycle.

“We’re definitely seeing a growth in tendering.

“(Miners) have been spending the absolute minimum on sustaining capex, they will need to increase those dollars per tonne on a sustained basis.”

Mr Sala Tenna said higher margins and more work available would be needed to justify the recent rises in valuations, some of which have been substantial.

Performance

NRW Holdings was way ahead of the pack with a one-year total shareholder return of more than 1,300 per cent, according to the BNiQ Search Engine, after the company won a contract to work on the Forrestfield Airport Rail Link.

Across a basket of 14 listed contractors selected by Business News, one-year TSR averaged more than 200 per cent, with 12 companies in positive territory, although trucker McAleese, now in administration, fell sharply.

Ausdrill, which won around $1 billion of contracts, mostly for work in Africa, was the second strongest performer, with a one-year TSR of around 500 per cent. All of those contracts were for gold mining.

Longer term, Ausdrill and NRW are down on the highs of 2012, posting five year TSRs of -13 per cent -22 per cent respectively.

That was true more broadly, with investors in the sector worse off than they were in 2012 as five-year TSR averaged -5 per cent.

BNiQ rankings

The shortage of work in mining services has led to a notable fall of the number of employees at the top 10 companies on the BNiQ Search Engine Mining Contractors list – down 13.9 per cent over five years to 8,361.

That number represents a recovery on 2016, however, when the top 10 came in at 7,842.

Many of the names at the top end of the list are the same as 2012, at the peak of the mining construction boom, although Thiess (a subsidiary of CIMIC Group, formerly Leighton Holdings) has moved up to sixth on the latest mining contractors list. MACA moved four spots from 2012 to fourth ranking currently.

Macmahon Holdings has fallen from fourth in 2012 to seventh.

The rankings would get a shake-up if Cimic were to be successful in its $174 million bid for MacMahon, with a combined Thiess-Macmahon entity likely to be ranked number one.

Privately held Barminco, which was ranked number one on the 2012 BNiQ list, had three big contract wins last year totalling around $750 million, but is ranked third on the current list.