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Mining services update

February 2013

Mining update February 2013We are pleased to introduce our first Mining Services update for 2013. 

Following feedback from our Mining Services seminar last year we would like to provide updates and alerts to our clients on issues that may be of interest, trends in the market and our insights. 

If you would like to receive further information on the topics below or the industry generally, please feel free to contact one of our team listed below. 

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Wild weather in QLD and northern NSW

Flooding in QLD and northern NSW in late January 2013 has resulted in disruption to some mines and rail networks. The wet weather may also have affected the coal quality in the region due to the additional moisture content in stockpiled product. The major concern for mine operators post wet weather will be the logistics of getting coal to port as the rail networks have been impacted in the lower Bowen basin. 

Any wet weather and flood events also affect mining services. There are some services companies which may have idle equipment on rain affected mines, or experience decreased workforce utilisation. However, wet weather also increases competition on mines not affected by rain as equipment and people are moved around to maintain utilisation. This may result in margin and revenue pressure for a number of services companies. 

Managing cash for statutory payments following the Christmas break

January and February of each year is always tight on cash flow for mining services as production is affected by Christmas period shut downs and wet weather. In addition to their usual cash management practices, services firms will soon need to submit and pay their BAS and superannuation. We often find that some mining services will not have been able to save the cash for these payments and will need to talk to their banker for additional facilities or enter an arrangement with the ATO. This may also be a symptom of wider cash flow forecasting issues and controls, budgetary discipline or margin squeeze. We recommend to our clients to stay close to their customers during this process and their forecast. 

Iron Ore majors continuing to tighten the belt

With the continued pull back in activity from the majors such as BHP, RIO, Xstrata and FMG in Q3/Q4 2012 some Western Australian based mining service contractors have experienced a period of limited quoting and drying up of the forward order book. Whilst the recent uplift in iron ore price has had some marginal impact on market outlook, the majors are still focused on cost reduction across the entire supply chain. Many contractors have not sufficiently planned for this and whilst some contract awards have been made, the reduction in schedule or rates (10-15% minimum) will have a material impact on operating margins. This will take some time to flow through to contractors’ cash flow, and therefore working capital management during 2013 will be critical for survival of the non-tier one contractors with exposure to the mining services. 

Understanding the levers available to maximise business value

Whilst most privately owned mining services operators can see the effect the current market uncertainty is having on pipeline and profits, they are less aware of how it is impacting business value. Depending on what sample of mining services stocks you pick, earnings multiples fell by around 20% to 40% in 2012.  Notwithstanding an uptick in 2013, for those owners looking (or worse still, forced) to exit or raise equity in the current market, a combination of reduced profits and lower earnings multiples makes for a challenging environment. We are increasingly working with owners to educate them on the various value ‘levers’ and how best to maximise value in the current market.

Renewed focus on contract management

We have seen a marked increase in mining and mining services groups focusing attention on contract management. This has been driven by a sharp increase in contract disputes, economic uncertainty and increased financial and time pressures that have resulted in projects running overtime and over budget. The inherent difficulties in managing multiple and large contracts to budget are, in some instances, also being compounded by reduced staffing levels that are exposing further procurement and fraud risks along the contract management process that need to be identified and managed proactively. 

Contact us

If there is anything you wish to discuss further, please contact one of the team:

Nick Harwood
Tel: +61 7 3308 7136
Gary Doran
Tel: +61 8 9365 7080
John Greig
Tel: +61 7 3308 7108
David McCarthy
Tel: +61 2 9322 7086
Paul Childers
Tel: +61 7 3308 7205
Sal Algeri
Tel: +61 3 9671 7362
Graham Newton
Tel: +61 7 3308 7080


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