forge scaps

Mining services company Forge Group collapsed after major issues with two of its power station contracts.

Construction overruns and issues in the cost estimates for the Diamantina (DPS) and West Angelas power station (WAPS) contracts resulted in writedowns, and according to the administrators Ferrier Hodgson, a loss of $326.5 million for the seven months to end of January 2014, and debts of more than $207 million (not including insurance bond facilities drawn to $265 million).

Blame appears to lie at the feet of management.

Both power station contracts were acquired when Forge bought out CTEC in 2012. But according to the administrators, the due diligence conducted on CTEC appears shallow at best – including major concerns over CTEC’s ability to complete the DPS project at forecast margins.

Forge still went ahead with the acquisition.

And that may well have been driven by Forge executives incentive based on growth, and their lack of significant share holdings.

Lesson 1 - Grossly inappropriate KPIs and Bonuses set by the board.

Lesson 2 - Management held very few shares.

Lesson 3 - Risk management ineffective in the face of potential bonuses.

Lesson 4 - What’s reported in the income statement, balance sheet and cash flow statements means nothing in terms of risk.

While Forge are gone,the likes of Boart Longyear (ASX: BLY) and Emeco Holdings Limited (ASX: EHL) two of many in the mining services sector with large debt balances. The likes of Sedgman (ASX: SDM) are probably the best placed to pick up the scraps and forge ahead. (Excuse the pun)