Ann: FMG Contract Expiration , page-14

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Resource Equipment Ltd (RQL) - BUY

Event - FMG contract loss

* RQL today announced the expiration of a contract with Fortescue Metals Group Ltd (FMG).
* The contract for dewatering pipeline installation at the Cloudbreak mine site was held by DSA (a wholly owned subsidiary of RQL) and will not be renewed. FMG has elected to consolidate these installation services with other related services. Management of the combined services will be overseen by an upper tier contractor.
* According to management, revenues from the expired contract with FMG would have constituted approximately 8% of group revenues on a pro-forma basis.

Impact

* DSA is in discussions to re-tender as part of the revised format (i.e. as a subcontractor), the likelihood of success is unknown at this stage.On the assumption that the re-tender does not eventuate, RQL has lost a significant contract. FMG was one of RQL's top 10 clients and was DSA's largest client. We believe this equates to revenue of circa $5.0m and EBITDA of circa $1.3m per annum (or circa 5% of our FY12 EBITDA forecasts).
* The announcement comes as a surprise and is merely 6 months after RQL acquired DSA. The contract loss is the first negative announcement from RQL since listing on the ASX in 2008. While it is likely to be an isolated incident, specifically a client altering its buying arrangements, it does highlight RQL's inherent contract renewal risk. We note that the Consolidated Minerals (Woodie Woodie manganese mine) contract is currently up for renewal. The contract accounts for circa 21% of revenue. A 3 year extension is being sought by RQL. The original contract dates back to 2004 and was renewed in 2009, as such we believe the likelihood of renewal in this instance is high.