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Contractor says 'over optimistic' mining services industry coming down to Earth

by resources reporter Sue Lannin

Posted 1 hour 1 minute ago

Map: WA
Western Australian contractor Clough says the mining services industry is ripe for consolidation and it is on the hunt for takeover targets as the heat comes out of the resources boom.

As mining investment peaks, contractors that build mines and carry out earthmoving works have been hit by a wave of profit downgrades and share price slumps.

Thousands of jobs have gone in the mining services industry over the past year as mining contracts have been curtailed or cut back.

Clough is an engineering, construction and logistics firm which focuses on the energy and mining industries.

It is doing engineering and construction work for some of Australia's biggest liquefied natural gas projects including Chevron's Gorgon project off the north-west coast of Western Australia.

Clough chief executive Kevin Gallagher says his company is on the lookout for takeover targets.

"The sector lends itself to consolidation over the next couple of years," he told the ABC.

"We are looking at some inorganic opportunities, some acquisition opportunities, so yes, we are looking to take advantage of the slowdown in that sense."

Mr Gallagher says the mining services industry did not do enough to prepare for the downturn in the mining industry.

"There was possibly a feeling that it was going to keep going, the boom was going to keep going for another couple of years," he said.

"We've seen the slowdown now and those downgrades, I would imagine, are a reflection of re-forecasts. So maybe there was over-optimism."

Unlike most of its peers, Clough has upgraded its profit and revenue expectations as it focuses on the booming LNG industry.

Audio: Claims over-optimistic mining services industry coming down to earth (PM)

It is predicting that before tax profit for the current financial year will come in at around $90 million on revenue of $1.5 billion.

Mr Gallagher says Clough cut its overheads by $10 to $12 million over the last 18 months and consolidated its offices.

"We saw this coming some 18 months or so ago and we starting preparing then for what we expected would be a downturn across the sector," he said.

"We implemented a number of austerity measures across our business then."

Although its shares have fallen by nearly 13 per cent over the past 3 months, Clough shares have increased by half over the year to $1.13.

Others in the industry are also making moves.

Recruiter, Skilled Group, has just announced it will buy Northern Territory based oil and gas marine contractor, Broadsword, for more than $75 million.

One analyst, who wanted to remain anonymous, was sceptical about the possibility of major takeover activity in the sector.

He said the future was too uncertain for large scale mergers and acquisitions with companies more likely to concentrate on raising cash from investors.

Firms whose main clients are miners face difficult times, such as earthmover NRW Holdings and drilling firm Boart Longyear.

In a research note, stockbroking firm Hartleys said that NRW faced "significant earnings risk given the exposure to large mine construction".

High costs such as wages remain a big challenge for the both mining and LNG industries.

Mr Gallagher says it will take some time for expenses to come down as contracts end.

"I think for the major projects it's too soon to say that costs have come down," he said.

"I would expect we see the costs come back over the next two to three years."

http://www.abc.net.au/news/2013-06-17/clough-says-mining-industry-coming-down-to-earth/4761314