The pain is not over yet for mining services

Ausdrill says trading conditions worse than expected

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published November 5, 2013 12:24 pm AEDT

Mining services companies face more woe, or "difficult trading conditions" as corporate spin puts it.

Today, Ausdrill (ASX: ASL) went into a trading halt, so the company could prepare and provide the ASX with an update on its outlook for the financial year to end of June 2014. The company says that its current operating performance and ongoing challenging market conditions are weaker than expected.

Ausdrill had already warned the market in August that there was ongoing uncertainty in the mining industry over future demand. As a result, the company said it was reviewing costs, reducing inventory levels and restricting capital expenditure. Ausdrill provides a suite of services to mining companies from drilling to equipment hire, contract mining and supply of equipment.

The company finds itself in the same boat as Boart Longyear (ASX: BLY), the world's largest supplier of drilling services and equipment. Boart has been hit by massive downturns in business with adjusted EBITDA more than halving in the first six months of 2013, and the share price has followed suit, dropping from over $4 in May 2012, to 42 cents today.

Mining machinery maker Caterpillar has also announced that it will cut up to 200 jobs in Tasmania, as it restructures the production of underground mining equipment at its Burnie plant. Yesterday, local mining equipment manufacturer, Bradken (ASX: BKN) announced that it expected to report operating EBITDA of around $85 million for the six months to December 2013. That is likely to see the company report its second consecutive fall in net profit, following a 33% drop for the full year to June 2013.

And it seems that mining services companies can't take a trick, with Forge Group (ASX: FGE) also going into a trading halt while it investigated potential underperformance of a number of power station projects.

Foolish takeaway

A plethora of mining contractors and companies servicing the mining industry have reported weak conditions over the past year or so, as miners cut back on capital expenditure and attempt to cut costs and increase productivity. That has included cuts to exploration, as miners focus on their producing assets, and means mining contractors are bearing the brunt of the pain. From the recent announcements it's appears that it's not over yet, and investors may want to steer clear of the sector for now.

Automatic Renewal

By taking up this offer, you will also be enrolled in our auto-renewal program, which is our way of making your ongoing subscription easier by ensuring uninterrupted service. Don't worry, though – you're not locked in, and can cancel your auto-renewal at any time before each 'anniversary' date without question or penalty.