Mining gloom deepens with no bottom in sight
The gloom enveloping the mining sector deepened Tuesday with the collapse of a labour hire company putting thousands of jobs at risk just as contractor Downer EDI warned of falling profits and coal miner Peabody cut output further at its local mines.
Drill service outfit Ausdrill also suspended trading in its shares late on Monday as it finalises a heavy asset write-down in the wake of a fall in demand.
Downer EDI said its year to June 2015 net profit would be about $205 million, well down from the $216 million profit booked in the financial year just finished, with the fall attributed to the ongoing pressures being felt in the mining sector.
”It’s hard all across the business,” chief executive Grant Fenn told analysts. ”Across all underlying businesses .. margins are down. We have to get our business as tight as we can.”
He was speaking in the wake of the collapse of Bluestone Global, a labour hire company, which left its receiver, KordaMentha, scrambling to keep its 3500 contractors at work. The largest block of contractors is in the mine services sector in the Hunter Valley. By late Tuesday the positions for nearly all of these contractors had been finalised, with an estimated 220 truck operators and trainees moving to Skilled Engineering, as 35 light vehicle trades moved either to Skilled Engineering or to WorkPac, and another 80 staff working at other sites moving to other contractors.
But the jobs of thousands of others remain in limbo with the receiver, KordaMentha, scrambling to transfer the contractors across to new labour hire firms. Bluestone had faced ongoing liquidity problems which had been exacerbated by its failure to raise $4 million from shareholders in May. It had earlier overhauled its board and appointed a new chief executive, while closing an offshore arm in the Philippines and putting its mine services arm, ResCo, on the auction block.
”The receiver is seeking to transfer as many [workers] as it can to existing labour hire companies,” a spokesman for KordaMentha said. ”The receiver is confident it can place just about all of them.” Even so, as many as 180 full-time employees lost their jobs with its collapse.
Along with its exposure to the mining industry, Bluestone also has a large presence in transport/warehousing and sections of the hotel industry.
It collapsed as contract driller Ausdrill flagged a heavy write-down of the book value of its assets as it battles a slide in demand for its services. Another drill contractor, Boart Longyear, has been also struggling to stay afloat as it pursued a range of restructuring options, to date with no success, which has left its share price languishing.
None of the bigger operators in the sector are willing to call the bottom, with all operators preparing for further near term pain. Downer Tuesday, for example, said it expects profit margins in the mine services sector will remain under pressure, which prompted it to cut its forecast for its year to June 2015 net profit to $205 million.
”We’re expecting margins in mining to return to more sustainable levels of about 7.5 per cent,” Mr Fenn told analysts following the release of its results, reflecting his view that margins will continue to contract.
In June Downer lost a contract on the large Goonyella mine in central Queensland, although it continues to work on another mine in the area, South Blackwater, which is owned by the same company, a joint venture between BHP and Mitsubishi Corp. Following the loss of the Goonyella contract Downer shares were sold off sharply, and are yet to recover.
”The share price reaction to the Goonyella loss was overdone, and we trade at a 40 per cent discount to pretty mediocre peers,” Mr Fenn said.
In response, Downer on Monday unveiled a share buyback as it seeks to give its share price a lift, which would give it a tradeable currency to pursue merger and acquisition options over the next 12 to 18 months. It gave no specific details of how many shares could be bought or at what price.
For Peabody, it is slashing output at its Burton mine in central Queensland, which contract miner Thiess operates. It said annual output will be cut to just 1 million tonnes of coking coal annually from 2.5 million, citing the fact that the mine is its highest cost mine in Australia. It was unclear how many jobs are affected.