Forge Group awarded $100 million Rio Tinto contract

With cash in the bank and growing order book, Forge is well placed to outperform its peers.

Andrew Mudie

Andrew joined the growing team of Motley Fool freelance writers in mid-2013 following years of personal development as a passionate self-taught sharemarket investor. At the time, Andrew was an engineer by trade, writer by hobby, and an investing nerd by passion who spent far too many breaks reading, writing and learning. Andrew’s first investing lesson came with his first stock selection in 2011 when takeover rumours caused a spike and subsequent plunge in the share price of Woodside and then the 21% fall in the market through mid-2011. The next four years of investing saw Andrew dabble in a vast array of strategies until settling on his favourite investment methodology, which is closely aligned with that of the Motley Fool: Fundamentals-based long-term buy-and-hold of great companies at great prices.

Published September 12, 2013 1:27 pm AEST

Forge Group (ASX: FGE) has been awarded another large contract, this time for $100 million of work at Rio Tinto's (ASX: RIO) Yandi Sustaining Project.

The contract is for structural, mechanical and piping works at the iron ore mine in Newman, Western Australia. The project is aimed at expanding production at the site from 53 million to 56 million tonnes per year and will take 11 months, commencing in January 2014.

The additional production will be achieved by mining the South-West A and C ore deposits in addition to the current South-East deposit. Forge will be working on the mining facilities and stockyard at the South-West deposits.

The contract will increase Forge's order book from $2.1 billion to $2.2 billion. The company has been successful at tending for projects in 2013, with over $1 billion of contracts awarded so far. In a coup for Forge, it was awarded $800 million of a $1.47 billion contract for the Roy Hill Iron Ore Mine earlier in September.

Forge's CEO David Simpson noted that the company has a strong relationship with Rio Tinto was pleased that the Forge was being acknowledged for its terrific track record of delivering projects in Australia's iron ore sector.

Forge was one of only a handful of mining services companies to announce strong rises in profit and revenue in 2012-13, reporting a 36% rise in earnings to $1.1 billion, and a 28% rise in profit to $62.9 million. Mr Simpson was optimistic about the results and the coming year, noting that the company had performed well in poor market conditions and has maintained cash of over $103 million which will be used to pursue growth opportunities.

After falling 10% on the day of releasing the results, the share price has risen around 15% to be trading at $5.45 at the time of writing.

Foolish takeaway

Forge is demonstrating the good reputation it has in the mining industry by being awarded multiple large contracts in 2013, when the sector as a whole is struggling. With cash in the bank and growing order book, Forge is well placed to outperform its peers and register solid share price growth in the coming year if all contracts are executed successfully.

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Motley Fool contributor Andrew Mudie does not own shares in any of the companies mentioned in this article.

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