The Distillery: Boart's bung year

Jotters detail the speed and magnitude of Boart Longyear’s downturn, but one says the market responded calmly relative to the weight of its problems.

Boart Longyear scared the bejesus out of investors yesterday and two commentators underline the startlingly negative aspects of their results that stand out even from the rest of the downtrodden mining services sector. Also in company news, the ongoing strategy of Caltex Australia gets some attention.

The Australian’s John Durie writes that Boart is at the “edge of a cliff”, with its hopes of survival pinned to a stronger mining outlook or copping a higher interest rate.

“It’s not quite as black and white as that, but let’s just say there is a 50 per cent chance the company will breach debt covenants in December, depending on how financial and commodity markets travel from there. The company supplies drilling rigs to energy and mining companies, mainly goldminers. It is talking about earnings before interest, tax and depreciation of $116 million for the full year, after reporting earnings totalling $80 million in the first half. That suggests second-half earnings of about $36 million, against $100 million for the same period last year, which shows how conditions have plummeted. The extraordinary thing is how calmly the market took the news yesterday, because it is not often that a big company confides it has to justify its existence as a ‘going concern’. That is generally taken as read.”

Business Spectator’s Stephen Bartholomeusz says there’s a “breathtaking aspect” to the mining services company’s results.

“The starkest and most startling number in the group’s June-half result was the 35 per cent slump in revenue. Compared to a year ago the group generated $US380 million ($420.5 million) less revenue. In that context it’s not surprising that it is racing to restructure its debt to avoid breaches of its financial covenants that could occur as early as December. Losing more than a third of your revenue base within 12 months – an annualised $US760 million – has to be traumatic and produce dramatic responses. A 38 per cent reduction in head count – about 4300 positions – including a quarter of general and administrative positions – is quite dramatic. The disconcerting and depressing thing for Boart and all the other contractors grappling with the downturn in capital and recurrent spending within the resources sector in response to China’s slowdown and the evolving supply-demand dynamics for commodities, however, is that the structural changes have yet to settle at a new level.”

Meanwhile, The Australian Financial Review’s Matthew Stevens writes that the underlying strategy of Caltex Australia boss Julian Segal is geared towards the “dark arts” of bulk fuel logistics over Australian refining, because greater yields will be found there.

“This pitch made thoroughly consistent good sense through all of the Segal years. Until now, that is. Because the exchange rate worm has taken a turn for the positive and should it be sustained it will improve the underlying economics of petrol refining here. And, for good measure, better refinery yields with an improved product mix at its Brisbane refinery particularly and lower freight costs have already driven the Caltex refiner margin to $11.76 a barrel from $9.87 a barrel in the first half, adding $90 million to its EBIT. Segal’s interim report, meantime, offers clear insight into the sort of exchange rate exposure currently unmitigated by Caltex’s change of focus.”

Fairfax’s Elizabeth Knight says Caltex’s decision to turn the Kurnell Refinery into a storage facility is part of the company’s shift away from the risk in local manufacturing.

“By the end of next year Kurnell won’t be operating as a refiner. The effects of this will be, firstly, to increase its earnings dependence on marketing and distribution. The second will be to free up capital that will be either returned to shareholders or reinvested in distribution. Thus in future Caltex will rely more heavily on the market share in retail fuel distribution and its commercial customers. There are plenty of mini-Caltex operators across the country that have distribution and storage facilities that can fill in some of the geographical gaps and provide opportunities for the company’s incremental growth.”

The Australian’s Judith Sloan runs through some of the decisions Labor has made over the last six years that have inhibited small business.

The Australian’s economics editor David Uren says the pessimism about China’s economy that met Kevin Rudd when he resumed the prime ministership has faded somewhat with a string of solid economic data.

The Herald Sun’s Terry McCrann speculates on whether Rudd’s high-speed rail proposal is just a hail mary to salvage the election.

And finally, The Australian Financial Review’s Chanticleer columnist Tony Boyd gives us an insight into the playbook recommended by former deputy secretary of Treasury, Mike Callaghan, about how to establish a dialogue with the public about tax reform.

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