Mining Services Feel Heat as Australia Resource Boom Cools

By Rhiannon Hoyle

SYDNEY--Service companies that rode the wave of investment in Australian resources are facing harder times, reporting a slew of earnings downgrades and preparing to move their focus overseas as a decade-long mining boom slows.

Transfield Services Ltd. (TSE.AU) and Boart Longyear Ltd. (BLY.AU) Tuesday became the latest contractors in the sector to warn that profit would be weaker than anticipated, and to announce sweeping job losses as they adjust to an oncoming peak in mining investment.

Australia's resources sector accounts for almost 10% of the country's job market--about double the level a decade ago--and close to 20% of national output. In recent years, much of the employment growth has come from companies that service mining operations, including power generators, engineering firms, and those that transport raw materials to ports for export.

However, the future of those companies looks increasingly uncertain as customers such as BHP Billiton Ltd. (BHP) and Woodside Petroleum Ltd. (WPL.AU) scale back their investments as projects reach completion, or else shelve those whose costs have escalated to focus instead on production from their existing assets.

BHP's new chief executive, Andrew Mackenzie, pledged this month to put the brakes on investment over the next few years, responding to shareholder concern over the massive spending budgets mining companies have dedicated to expanding capacity, even as commodity prices fell sharply last year.

Australia's central bank has sought to manage the shift from soaring investment to a less labor-intensive production phase in the resource industry by lowering interest rates to a record low this year, hoping to boost consumer spending so that other parts of the economy are able to absorb job losses in vulnerable areas such as mining services.

"The downturn in capital and exploration spending in the mining sector globally has clearly reduced the demand for drilling services and products," Boart Longyear's Chief Executive Richard O'Brien said on Tuesday, as the company revealed that it had cut more than 1,000 jobs this year.

Separately, Transfield said it would axe 113 positions as it struggled with cutbacks and project cancellations within the mining industry. It is the second time the company, whose shares fell 24% to record low in Sydney, has lowered its profit guidance this year.

The slowdown has deepened rapidly in recent months, contractors say, echoing a government report that showed unemployment rose at an accelerating pace in the most resource-rich state of Western Australia last month, while remaining steady or falling in less mining-dominated parts of the country.

"Since [late April], it has become even clearer that the Australian economy is contracting," Coffey International Ltd. (COF.AU) said in a statement to the market last week. "We have had to respond to deteriorating Australian market conditions and resultant project delays" through cutbacks including 150 redundancies, the geosciences and project management firm said.

WorleyParsons Ltd. (WOR.AU) said its business here had also been hit. The company, which had previously forecast earnings growth for the year to the end of June, said it now expects net profit of as little as 320 million Australian dollars (US$314 million), compared with last year's A$345.6 million. Service companies UGL Ltd. (UGL.AU) and Sedgman Ltd. (SDM.AU) have also issued profit warnings this month.

In addition to shelving projects, companies like BHP have been cutting operating costs at their existing mines in a bid to boost profit margins. In April, the world's biggest mining company prematurely axed a contract with Leighton Holdings Ltd. (LEI.AU) and replaced the contractor with a cheaper private firm.

The picture may not be as bleak as it appears, according to Wood Mackenzie, a consultancy that studies the resources industry and expects investment to peak this year at 85 billion Australian dollars (US$84 billion). It sees robust investment for a while to come thanks to committed gas projects such as the US$34 billion Ichthys liquefied-natural-gas facility in Australia's Northern Territory, and the resumption of previously deferred coal developments as prices rebound from depressed levels linked to China's slowdown last year.

That prospect hasn't stopped some mining services companies from looking offshore for growth.

"It is clear that we need to move our focus from an Australian-centric approach to one where we export our skills to markets where our services are valued," Leighton's Chief Executive Hamish Tyrwhitt said at the company's annual general meeting on Monday. He said the contractor was looking at India, southeast Asia and sub-Saharan Africa as places to expand into.

WorleyParsons, meanwhile, has said it plans to target China and the U.S. to help offset the weakness in Australia's mining sector.

Write to Rhiannon Hoyle at [e-mail]

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