Will Downer EDI buck the mining services trend?

Downer wins $500 million contract at Roy Hill.

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 November 19, 2013 1:11 pm AEDT

Downer EDI (ASX: DOW) on Monday again provided evidence that it may not suffer the same fate as some of its mining services sector rivals. Downer announced that the company had won a $500 million contract at Gina Rinehart's Roy Hill iron ore project in Western Australia.

The four-and-a-half-year contract is for early mining services including "pre-strip and supplementary mining activity over the initial years" of the mine, primarily focusing on "drill and blast, and load and haul of overburden and ore". Downer expects to spend around $110 million on capital items, including new and equipment for the project, and will likely employ 220 people over the course of the project.

Downer is one of the larger Australian engineering and maintenance businesses, undertaking infrastructure and mining services projects, as well as the manufacture of rail rolling stock. During its AGM earlier this month, the company reaffirmed guidance for 2013-14 for net profit of around $215 million, in line with the 2012-13 result.

This was in stark contrast to a number of contractors in the mining services industry. Ausdrill (ASX: ASL) downgraded earnings and profit guidance earlier this month, resulting in a 32% drop in the share price, while Forge Group (ASX: FGE) continues to be in an extended trading halt as investors nervously await the expected downgrade.

Foolish takeaway

The Roy Hill project has been a blessing for some of the sector's mid-sized companies. NRW Holdings (ASX: NWH) earlier this year won a $620 million contract for earthworks, while Forge Group was part of a joint venture that won a $1.47 billion contract for EPC works.

Mining services companies continue to be extremely high risk, as shown by the extended trading halt and rapid capital raising from previous market darling Forge Group. Investors with nerves of steel should consider the better performing companies such as Downer and NRW holdings for exposure to the mining sector.

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