29/10/2008 - 22:00

Uncertainty hammering contractors

29/10/2008 - 22:00

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DRILLING contractor Brandrill summed up the quandary facing mining services companies in the current unsettled market.

Uncertainty hammering contractors

DRILLING contractor Brandrill summed up the quandary facing mining services companies in the current unsettled market.

Speaking at the company's annual meeting this week, chairman Vince Pendal said the global financial crisis had prompted a review of its forecasts for activity and profitability.

"Basically we can't see much changing, but there is great gloom in the markets and we should take account of this," he said.

"Hence, we will increase our conservatism and place a greater emphasis on cash retention and debt reduction."

Many other contractors are in the same situation. They are still very busy, winning new contracts and in many cases recruiting more staff; yet, they have been hammered by the market because of uncertainty about future prospects.

Broking firm Hartleys has tried to bring some perspective to this.

A research report released this week concluded that there will be a slowdown as a result of weak commodity prices, but it will "not be as abrupt as the market has perceived".

The stockbroker believes there is enough work to feed contractors for two more years.

But, says Hartleys, if the fall in commodity prices takes longer than expected to recover, the real dent will be significantly felt after financial year 2010.

Consequently, it has scaled down its earnings forecast for most companies from FY10 onwards by minus 10 per cent.

Paladio Group Ltd is one company successfully swimming against the current, recently winning a $115 million Woodside contract for civil works at the Pluto LNG project on the Burrup Peninsula.

This follows a Woodside $80 million civil works contract in September.

It has also won significant contracts with BHP Billiton, Rio Tinto and Fortescue Metals Group.

Chief executive Victor Kuss said the contract extended Paladio's order platform well into FY10.

While Mr Kuss still sees some impact of the global financial downturn on the resources sector over time, he believes Paladio is travelling well.

"The two new contracts we have been awarded recently give us a good platform into next year," he said. "The market is still relatively strong for us."

Mr Kuss said his way of managing risk in an uncertain future was to focus on core business, deliver to clients what they need, do what the company knew best and not try to second guess what's happening in the market.

Contract miner NRW Holdings, meanwhile, is expected to start work in December on a new three-year $60 million a year contract to drill and blast, excavate and haul ore and waste at OM (Manganese) Ltd's Bootu Creek mine in the Northern Territory.

The initial mining fleet will be transported to site next month, with full operations underway by mid-January, 2009.

NRW chief operating officer Jules Pemberton said this week he was not as uncomfortable with the effects of the credit crunch on WA's resources industry as some investors and fund managers

"The level of expansion will be maintained and BHP will continue with its expansion and continue to supply ore," he said.

"We are not exposed to any smaller companies so its business as usual. But beyond 2010, who knows.

"We plan not to be tied to any one commodity. If work is not there, we will go to another commodity."

Mr Pemberton said NRW employed a mix of staff and contractors, predominantly on a FIFO basis.

"We are experiencing times no-one has seen before," he said.

"The credit crunch will have an impact on every business, one way or another, but we are confident about the prospects for our company."

NRW predicts a strong order book into 2010. Its contracts also include the $87m Cloud Break-Christmas Creek rail extension and the $201m Brockman 4 expansion.

Project manager Emerson Stewart has also underscored a positive future for the mining services industry by securing a $5 million BHP Billiton Nickel West contract for the upgrade of dry mess facilities at Leinster in the northern Goldfields.

The existing facility can provide more than 2,850 meals a day for FIFO personnel; at the mine's operational peak, the upgraded facility will provide more than 3,000 meals a day.

The contract is scheduled for completion by mid-2009.

Emerson Stewart managing director Dario Amara said the challenging times had not yet affected his company.

"We are still seeing the effects of the resources boom, although we know it will dampen," he said. "We have been sensible in developing our business model, not opportunistic."

Applecross-based Monadelphous Group, while suffering the downgrading of its stock from "accumulate" to "reduce", has received a positive outlook from Hartleys.

The broker said Monadelphous possessed all the qualities to get through the cyclical downturn with its excellence in project execution, good market reputation, diversified markets, strong cash flow management and balance sheet strength.

Also, one-third of its revenue was recurring through its maintenance service contracts.

Monadelphous provides extensive engineering construction, maintenance and industrial services to the resources, energy and infrastructure sectors.

Hartleys also posted a positive appraisal of Macmahon Holdings, which it upgraded from "hold" to "speculative buy".

Hartleys says there is still a substantial amount of work for mining service companies over the next few years and MacMahon should benefit.

Engineering and project management company Calibre Global is another Perth-based group on a growth phase despite the financial market turmoil.

It has grown to have 850 people since being formed six years ago and is actively recruiting for qualified people to work on expansion projects, mainly in the iron and alumina sectors.

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