MARKETS SPECTATOR: Ausdrill barometer

Mining services stocks are often seen as the canary in the coal mine. Their business outlook, reliant on the BHP Billitons and Rio Tintos of this world, can serve as an early warning signal or a clarion call to investors to pile into commodity stocks. That is perhaps why investors battered Ausdrill Ltd’s stock yesterday, sending it down 19 cents to $1.93 after it cut its full-year net profit forecast by as much as 20 per cent.

Ausdrill chief financial officer Jose Martins told Business Spectator demand for the company’s services had ebbed since September. Big and small miners were focused on cost cutting, he says. Martins says miners are delaying or canceling hiring, maintenance and drilling programs. It was hard to see when business could get better.

Ausdrill’s operations are extensive. It employs 6,000 people in Africa, Australia and the UK in exploration, blasting, contract mining, mineral analysis and procurement and logistics. “Long-term we’re confident things will improve but now the focus is on deferring costs as evident in the coal industry and to a lesser extent in iron ore,” Martins said.

Mining services companies are often caught between a rock and a hard place. They are subject to abrupt contract termination by the miners who hire them yet are often locked into long-term contracts with those who supply their equipment. Liabilities can quickly mount as cash flow ebbs.

Many mining services companies such as the Gresham private equity-owned Barminco have been locked in negotiations with their banks for months to refinance loans that are essential to their continued existence. At least Ausdrill will make a net profit of at worst, according to its latest ASX statement, $90 million in the 12 months to June 30. Some of Ausdrill’s competitors wish they were in a similar situation: giving a profit warning but still making one.