Australian mining service companies face further credit rating downgrades going into 2016-17 if they are unable to lift their performance.
According to a report from credit ratings group Standard & Poor’s, investor and lender appetite towards the sector is “choppy and skittish”, which is “not unique to mining services but the mining sector in general”.
"The size of the debt load creates refinance risks, particularly since most companies have weak earnings making it difficult to made any ‘bullet’ or large one-off loan repayments.
“We don’t see any material improvement until the mining business cycle improves,” S&P analysts said in the report.
Companies in the sector need to find ways of halting the slide in earnings and/or improving the chances of refinancing borrowings in the coming year.
Some companies are moving out of mining or diversifying into infrastructure spending which has helped give them access to new revenue streams. Others have driven growth in new non-related sectors, such as testing group ALS which is now promoting its non-mining services as its future growth engine.
Others are hacking and slashing into costs and staffing levels – such as oil and gas consultants, WorleyParsons.
The one common point for companies in the sector is that their former strong point – their mining and resource clients – are no longer reliable generators of continuing business.
Like all other contractors, service companies are continuing to find it difficult to stabilise earnings as their clients drive their suppliers to provide much of cost cuts the clients need to improve their financial strength.
And even though commodity prices have picked up from their multi-year lows at the end of 2015 and early 2016, they remain low historically in many cases, or face years of sluggish demand.
Oil and gas prices are a case in point – $US50 a barrel is now greeted as ’saving’ producers, and yet two years ago it was a price level that many thought would ruin producers large and small.
What it has done (and continues to do so) is demand producing companies cut costs continuously in exploration, development and production.
And BHP Billiton CEO Andrew McKenzie should have sent a tremor of fear through the contracting and services sector with his forecast this week that the slump in iron ore would take a decade to work out.
And BHP’s coal boss MIke Henry’s warning this week that the company was looking for another $US600 million in cost cuts over the next year should add to the angst in the contracting and servicing sector.
“Although Australian mining services companies have streamlined their operations and become more efficient, their customers in the broader mining industry are wrestling with persistent commodity price weakness,” theS&P’s global ratings credit analyst May Zhong said.
"Because of the tough industry conditions, we don’t expect a strong earnings recovery for mining services companies until activity in the broader mining industry picks up sustainably."
The agency rates six local mining service companies and so far this year it has taking negative ratings actions against three of them, it said.
Further, the rating outlooks exhibits a “negative bias" it said, since four of the six companies are on negative outlook which indicates the possibility of further downgrades if the decline in profits cannot be arrested.
Several companies face large lump-sum debt repayments over the next few years which may need to be refinanced, the report said. The report pointed to refinancings of $2.5 billion which are due in 2018 and 2019.
"Notwithstanding mining services companies’ efforts to reduce debt, their capital structures under current industry conditions may be unsustainable in the long term," the report noted.
"In particular, issuers such as Boart Longyear, Emeco Holdings, or BIS Industries, are likely to be dependent on favourable business, financial, and economic conditions to meet their financial commitments."
S&P lowered Emeco ratings to CCC last month and warned the firm could default on its debts within 12 months.
Last week S&P also downgraded underground hard rock miner Barminco Holdings from B minus to a selective default after the company bought back its own debt at below par value, a bond with a price below the face value, but that was removed and changed to B minus after Barminco completed the repurchase of bonds.
Barminco also got a boost last week when it was awarded a three-year contract at Northern Star’s Kundana gold mine in Western Australia worth $275 million.
