Reports of miners looking to cheaper production in Africa at the expense of Australia will add pressure to an already strained mining services sector. Companies with exposure to Africa will be well placed to pick up business while those only domestically focussed will be left battling it out for a smaller slice of pie.
With the slowing in Chinese growth and subsequent drop in iron ore prices, the end of September shut the door on a quarter that required mining service sector investors to don their hard hats. The consequences for companies in this sector, which is highly leveraged to the resource boom, have been dramatic. It's a long list of falls from grace that includes Boart Longyear's (ASX: BLY) 44% tumble in the last that months and claimed CEO Craig Kipp's scalp, and Macmahon's (ASX: MAH) 52% drop over the quarter.
With the structural challenges facing the mining sector in Australia, naturally some miners are looking abroad. With its lower labour and production costs Africa has appeal. Two companies that already have established operations in Africa capable of supplying services to miners include Ausdrill (ASX: ASL) and Coffey International (ASX: COF). Coffey CEO John Douglas recently highlighted the increased interest in Africa and his company's strong position and ability to win contracts there.
The other structural issue that concerns me is the potential for miners to switch from an outsourcing model to internal. Just last year, mining giant BHP Billiton (ASX: BHP) purchased HWE Mining from Leighton Holdings (ASX: LEI). This effectively moved 70% of BHP's iron ore business from an outsourced contract mining model to an internally owned and operated one.
The Foolish bottom line
Resources have always been a cyclical industry, and mining service companies experience the ups and downs too. Outsourcing is also a trend that comes and goes. Attempting to ride a cycle from low to high is fraught with the risk of missing the exit. On the other hand, buying businesses with sustainable moats at a reasonable price is a proven way to attain successful long-term investment results.
If you only invest in one company this year, make it our "Top Stock for 2012-13." Operating in two hot markets — one set to double by 2012, the other predicted to grow 5x over the next five years — this stock is a solid growth play that also boasts strong recurring revenue, zero debt, and lots of cash. Get its name and full research case in this brand-new FREE report.
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Motley Fool contributor Tim McArthur owns shares in Coffey International. 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. This article contains general investment advice only (under AFSL 400691)
