Mining services sector battles funding gap
Tuesday, 11 September 2012 - The next six months will see an increase in distressed businesses, M&A and consolidation in the capital-constrained mining services sector as miners focus on reducing costs and protecting margins in the wake of softening commodity prices.
EY’s Mining & Metals Transaction Leader, Paul Murphy, says high gearing levels – typically between 40-50% - for most listed mining services companies and limited access to capital means many mining services companies are facing a funding gap.
“Six months ago these companies were wondering how they were going to finance expansion to keep pace with the demand from the growth in mining capex. Now there will be a growing number of businesses with increasing pressure on margins and working capital, with little or no room to move,” says Murphy.
“At the same time, there are businesses still winning sizeable contracts but they don’t have the working capital facilities to fund them, so again the funding gap is the issue.”
There are an estimated 400 businesses in the mining services sector in Australia, as diverse in size and revenue as they are in nature, ranging from drilling, logistics, testing, explosives and blasting, to consulting, labour hire, construction and catering. Businesses are based right across Australia but with Western Australia, Queensland and NSW the base for most.
EY’s Corporate Restructuring Leader, Vince Smith, says the businesses most vulnerable to revenue and cost pressures will be those that require stable working capital lines or have constant debt servicing requirements.
“This would include businesses with a heavy equipment focus as well as building and construction type contractors,” says Smith.
“Similarly businesses with a heavy reliance on a narrow client base could quickly come undone if they have an inflexible cost base.”
Murphy says the mining services sector is “ripe for M&A activity”.
“We expect to see businesses that do have relatively strong balance sheets, to be opportunistically looking at possible acquisitions of competitors or complementary businesses that are under pressure,” he says.
“Miners facing margin pressures and concerns about supplier credit risk may also be weighing up the benefits of acquisitions to bring some services in-house.”
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