Markets: Cardno calm before the storm

Despite Cardno's hopeful profit guidance today, this earnings season is expected to reveal more dark days ahead for the mining services sector.

Reporting time is starting to provide a clearer indication of how mining service contractors are coping with reduced mining-related capital expenditures.

Companies leveraged to the mining sector are feeling the pain. The suffering is the result of an actual and planned pullback on exploration and related activities by mining majors, spurred by lower commodity prices and concerns about China’s future growth.

Cardno Limited (CDD) confirmed in an announcement to the market this morning they are expecting net profit after tax (NPAT) for the financial year to be around $77 million, which is at the upper end of their earlier guidance. They officially report August 20.

The announcement sent Cardno shares to a morning high of $6.30. Cardno is now trading around $6.09 to put them up around 4 per cent for the day. The jump is sure to be well received by investors, with Cardno down more than 25 per cent over the past 12 months before this morning’s open.

At the same time profit concerns and underlying sector exposure has weighed on Cardno, short interest has steadily been building indicating negative sentiment about the stock. Today’s announcement could see the short interest trend begin to reverse as punters look to exit positions.

Downer EDI (DOW) has had a better year than Cardno and is up close to 30 per cent. DOW is set to report tomorrow, however they have not changed their earnings guidance. Following the ASX principles of continuous disclosure, there shouldn’t be too many surprises in the final numbers reported tomorrow.

Reporting later this month is Boart Longyear (BLY) and NRW Holdings Limited (NWH), down 73 and 57 per cent respectively over the past year. Short interest in both of these companies has noticeably picked up since March, contributing to their downward spiral.

Investors aren’t alone in avoiding the sector. Ratings agency Moody’s have downgraded Boart’s debt and left a negative outlook on their borrowings based on their dismal outlook for the mining industry in general, specifically including new mine development. They were downgraded based on Moody’s diminishing outlook for the exploration and drilling expenditures as well as new capital investment by Boart’s major clients, the mining industry. 

Moody’s view could be the systemic view of the industry.