Doubts over Glencore plan
Barely two weeks after Australia's top commodities agency said investment in the resources industry had peaked and was set to decline, Glencore fired the contractor it hired to expand a mine near Cobar.
When asked if the contract termination was the precursor to cancelling the project, Glencore's local representatives said: "The company is considering its options with regard to the project."
The expansion would have seen a shaft at the CSA Cobar mine sunk deeper in a bid to lower production costs at the mine, which mostly produces copper and silver.
Macmahon Holdings was awarded the contract to sink the shaft, but told the ASX on Wednesday its contract had been terminated on Tuesday without explanation.
In a twist, Cobar mayor Lilliane Brady said she received a phone call on Saturday telling her that Macmahon had been dismissed on Friday, May 31, five days before it was declared to the ASX.
"I was in Sydney when I had a phone call to say Macmahon's had finished at Cobar Mines," she said.
The termination will only exacerbate a bad year for Macmahon, which has already forecast a $20 million loss for the year to June 30, after a $37.6 million loss in the six months to December 31.
The project was expected to deliver an extra $6 million of revenue to Macmahon this month, and a further $80 million in the 2014 financial year. About 70 jobs are understood to be linked to the expansion.
"Macmahon is currently seeking clarification on the reasons for, and consequences of, the termination," the company said. News of the termination pushed its shares down 2¢ to 16¢.
While Glencore will now review the project, operations at the existing Cobar mine - where more than 300 people work - are expected to continue as normal for now.
Glencore appears to have longer-term ambitions for the region, having scooped up exploration territory nearby and a stake in ASX-listed minnow YTC Resources, which also has ground nearby.
Glencore declined to confirm its long-term commitment to the existing Cobar mine on Wednesday.
Mrs Brady said the mine, which has operated on and off since 1871, was crucial to Cobar's economy. "Cobar Mines has always been the rock of town," she said.
If Glencore decides to cancel the expansion, it will continue a recent trend for companies to defer or cancel spending on resources projects.
Two weeks ago, the Bureau of Resources and Energy Economics said Australia had missed out on $149 billion of investment through 18 big resources projects being deferred or cancelled in the past year.
Frequently Asked Questions about this Article…
Glencore Xstrata has dismissed the contractor on a $110 million shaft-deepening expansion at the CSA Cobar mine and said it is "considering its options" on the project, signalling the expansion may be cancelled.
Macmahon Holdings said its contract to sink the Cobar shaft was terminated without explanation. The company is seeking clarification on the reasons and consequences of the termination and reported its shares were pushed down following the announcement.
The expansion was expected to deliver about $6 million of revenue this month and a further $80 million in the 2014 financial year. Macmahon has already forecast a $20 million loss for the year to June 30, after a $37.6 million loss in the six months to December 31, so losing the contract could worsen its financial position.
According to the article, operations at the existing Cobar mine, which employs more than 300 people, are expected to continue as normal for now even while Glencore reviews the expansion project.
About 70 jobs were understood to be linked to the expansion. If Glencore decides to cancel the project, those roles tied specifically to the expansion would be at risk.
Glencore has shown longer-term interest in the region by acquiring nearby exploration territory and taking a stake in ASX‑listed junior YTC Resources, but the company declined to confirm a long-term commitment to the existing Cobar mine.
The article notes a recent trend of companies deferring or cancelling resource project spending. The Bureau of Resources and Energy Economics said Australia missed out on $149 billion of investment through 18 big resources projects being deferred or cancelled in the past year, and Glencore’s review would be consistent with that trend.
Investors should watch for official updates from Glencore and Macmahon clarifying the reason for the contract termination, any decision on cancelling or proceeding with the expansion, company statements on operations at Cobar, and any impacts on Macmahon’s earnings and share price.
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