A heads up from the mining services sector – there seems to be a new spate of downgrades about to appear on the radar.
Ausdrill (ASL) and Force Group (FGE) both triggered concern by going into requested trading halts ahead of providing updates which will almost certainly be downgrades.
Both reports will most likely trigger price falls across the mining services sector.
Ausdrill, a Perth based drilling and maintenance services group, went into a halt yesterday – Forge on Monday. Both are expected to report to the ASX today.
The news will have investors watching the AGM of another leading contractor – Downer EDI (DOW), which is due to be held in Sydney today.
Ausdrill and Forge will join others in the sector such as Boart Longyear (BLY) and Imdex (IMD) which renewed warnings of a prolonged and severe downturn in the mining services sector.
In the year to June, Ausdrill’s net profit fell by just 7% to $100 million with revenues buoyed by the acquisition of the Best Tractor Parts business in November 2012.
But Ausdrill had issued one profit warning in April that it expected a profit of $90 million-$96 million compared with an earlier forecast of at least $112 million.
Yesterday it said in its request for suspension that it was "reviewing its current operating performance and ongoing challenging market conditions, which are weaker than expected".
The update will refer to the 2013-14 year and comes just with just four month of trading experience.
For that reason, the fall in activity and the impact on the company must be very significant, with no chance seen of recovering the position later in the financial year.
ASL Vs FGE 6-Months – Ausdrill, Forge to provide gloomy updates for mining services sector
On Monday Forge warned that an internal review of its operational performance had "identified concerns in relation to the underperformance" of two power station contracts.
These were its $420 million Diamantina contract in Queensland and a $150 million contract with Rio Tinto at the West Angelas iron ore mine in Western Australia.
The two contracts were inherited through Forge’s acquisition of CTEC, the company’s first major purchase under managing director David Simpson. Both are gas turbine power station projects.
Forge shares will be sold off this morning on the update by investors wondering if the company is on top of its businesses.
It was only last month that Mr Simpson told the company’s AGM last month that the company’s "strategy was on track" and it expected to "deliver acceptable returns from current projects".
Now two big projects seem to have run off the rails.
Ausdrill investors have suffered heavily this year, despite the company’s relative trading outperformance when compared to other mining services groups which suffered bigger falls in revenues and profits.
Between February and July the stock plunged from $3.24 a share to just 79c, before it began rebounding.
It last traded on Monday at $1.375. That level will be hard to sustain this morning.
Forge shares are down 28% since early September, which is a big fall in a relatively small period of time.
In fact they tumbled 16% from $4.93 last Monday to $4.18 on Friday.
Clearly investors suspected something wasn’t right because the overall market was up half a per cent last week.
That also will be a hard level to sustain this morning.
