26/09/2014 - 10:22

Mining services companies hit hard: EY

26/09/2014 - 10:22

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Accounting firm EY says debt levels and an ongoing focus on costs is placing more pressure mining services companies in Western Australia.

EY transaction and advisory services partner Vince Smith.

Accounting firm EY says debt levels and an ongoing focus on costs are placing more pressure mining services companies in Western Australia.

EY transaction and advisory services partner Vince Smith said the number of mining services companies had dropped 8 per cent in the 2014 financial year.

“With total debt for mining services companies still at historical highs, and capital investment by the mining sector forecast to fall a further 10 per cent in the 2015 financial year, conditions are only going to get tougher for those in this sector who are unable to adapt,” he said.

In the past financial year, 77 mining services companies listed on the ASX generated more than 25 per cent of their revenue from mining services.

That number a year ago was 84.

Explaining why resources companies are starting to drop off, Mr Smith said the issue begins with how mining companies were responding to the current economic climate.

“Miners are battling productivity, cost of operations, time delays and so on, and they’re seeking to address a lot of these cost challenges by passing cost cuts down to mining services companies,” he said.

“Mining companies are also battling with raising capital for new projects, so there’s a drop off in activity which is also being passed onto mining services companies through a lack of work available.”

Mr Smith said miners were battling with price and currency volatility, which had flow-on effects for mining services companies.

“They are responding to that by cutting their contractor head count and their spending amount on contractors, and in some cases, putting some of their projects on standby or pulling back on production quantities,” Mr Smith said.

“Whether that’s a sustainable strategy or not, I’m not sure.”

Mr Smith said that mining firms were placing a greater emphasis on getting their commodity out of the ground at the best possible price and with the maximum value to their business.

He said companies would be looking for stable and strong services contractors with strong balance sheets, and were prepared to partner with them

“What I mean by that is they will take some of the pain and hurt along the way with them, but also will find innovative ways to do business better, and hopefully cheaper,” Mr Smith said.

“So if contractors can do things smarter, more innovative and can deliver more value to their client, they’re the ones that miners want to partner with.”

 

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