The fallout over cancelled, cut-down or postponed mining resources projects has seen many of the mining services companies' shares suffer large falls. We've already seen drilling supplier Boart Longyear shares fall 46% in the last few days.
Fortescue Metals announcement yesterday that it was cutting back its infrastructure spend appears to have direct consequences for Downer EDI Limited (ASX: DOW), which provides contract mining services at the Cloudbreak mine, according to a report in today's Australian Financial Review. The company's Christmas Creek mine is also likely to come under scrutiny, where Downer and NRW Holdings Limited (ASX: NWH) are operating.
Mineral Resources Limited (ASX: MIN), which provides mining services for both mines could be affected as well. Leighton Holdings Limited (ASX: LEI) was named as preferred tenderer to provide contract mining services at Fortescue's Solomon hub, but has yet to sign a contract.
The market appears to be expecting the worst, with Downer and Leighton's shares down 12% over the last five days, while Mineral Resources fell 18% and NRW Holdings' shares have lost 17%.
In reality though, mining services companies are unlikely to see their revenues fall as much as the market may be suggesting – at least in the short-term. Some contracts will already be signed, so work may still go ahead, while cancelled contracts could see the miners forced to pay them out.
Many miners have also complained that they were struggling to get enough skilled employees, and this may alleviate the problem. For the mining services companies themselves, there may even be an advantage. Instead of working on several projects at once, they may be able to work on fewer, but string some together sequentially, extending their revenue certainty out further than they currently have. In other words, revenues might fall, but the companies will have a better idea of their future projects and cash flows.
The Foolish bottom line
Not all mining services perform the same services for the same clients, but the market doesn't appear to have taken that into account. Companies servicing the oil and gas or infrastructure sectors may be able to increase their revenues and profits over the next few years, while some have other divisions besides mining services. There could be some opportunities for investors in the sector, for those prepared to do some research.
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Motley Fool writer/analyst Mike King owns shares in Leightons. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
