Mining services companies face credit crunch: E&Y

CAPITAL intensive mining services companies carrying high debt have become vulnerable in the recent downturn in commodity prices as mining companies wind back the need for their services, according to research by Ernst & Young.
Mining services companies face credit crunch: E&Y Mining services companies face credit crunch: E&Y Mining services companies face credit crunch: E&Y Mining services companies face credit crunch: E&Y Mining services companies face credit crunch: E&Y

Ernst & Young partners Paul Murphy and Vince Smith, who have examined the 84 listed and 320 private companies, said the average gearing among these companies is 45 to 50% compared to large and mid-tier miners that usually keep their gearing below 20%.

The current volatility in commodity prices, project deferrals and weaker equity markets would make it difficult for some of these mining services companies to service their debts.

"Six months ago these companies were wondering how they were going to finance expansion to keep pace with the demand from the growth in mining capex. Now there will be a growing number of businesses with increasing pressure on margins and working capital, with little or no room to move," Murphy said.

"At the same time, there are businesses still winning sizeable contracts but they don't have the working capital facilities to fund them, so again the funding gap is the issue."

There are an estimated 400 businesses in the mining services sector in Australia, as diverse in size and revenue as they are in nature, ranging from drilling, logistics, testing, explosives and blasting, to consulting, labour hire, construction and catering. Businesses are based right across Australia but with Western Australia, Queensland and NSW the base for most.

Ernst & Young's Corporate Restructuring Leader Vince Smith said the businesses most vulnerable to revenue and cost pressures will be those that require stable working capital lines or have constant debt servicing requirements.

"This would include businesses with a heavy equipment focus as well as building and construction type contractors," Smith said.

"Similarly businesses with a heavy reliance on a narrow client base could quickly come undone if they have an inflexible cost base."

Murphy said the mining services sector is "ripe for M&A activity".

"We expect to see businesses that do have relatively strong balance sheets, to be opportunistically looking at possible acquisitions of competitors or complementary businesses that are under pressure," he said.

"Miners facing margin pressures and concerns about supplier credit risk may also be weighing up the benefits of acquisitions to bring some services in-house."

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