Mining services not dead yet

Mining services outfits may have become the lepers of the local market but not all of them appear to be infected.

Earlier this week Forge Engineering (FGE) picked up a $1.4 billion contract at the Roy Hill development in conjunction with a partner and this morning Monadelphous (MND) has further strengthened its favoured contractor status with Rio Tinto (RIO) by snaring  a new $235 million contract at Cape Lambert.

While the entire sector has been walloped by investors fearing the imminent end of the investment phase of the resources boom, this week’s news highlights the short sighted nature of investment markets and the blinkered view that all companies would suffer to the same extent.

The boom in mining services certainly has come to an end. But mining will remain the nation’s most important export and the resource giants will continue to rely on the mining services groups to provide engineering and infrastructure (see Brendon Lau's A mining services revival?).

Monadelphous, with a blue chip client base including BHP (BHP) and Rio Tinto along with a broad exposure to resources from energy including LNG and minerals, is one of the stronger performers in the sector as evidenced by its recent results.

It delivered a record $156 million profit for 2013 and entered this year with $1.3 billion in new projects (not including this morning’s announcement) although it warned that the earnings growth of recent years would not be replicated.

Its stock price was north of $27 in February but fell to a $15 in July before recovering to $19 this week. If any criticism could be levelled at the company during that time, it was that it failed to provide any guidance to investors at a time when almost every other company in the sector was issuing dire predictions about the future.

While the big ticket projects may be nearing completion, and cash flows will slow, not every services company will be affected to the same degree. It will be the smaller, less diversified operations or those with stretched balance sheets that will suffer.