Suppliers face loss-making deals as miners tighten screws

Major Drilling International

26/11/2014 14:49

* Global mining sector has cut $20-25 billion in costs- E&Y 
    * Iron ore, gold, coal prices hit multi-year lows 
    * Tougher competition could lead to suppliers consolidation 
 
    By Silvia Antonioli and Sonali Paul 
    LONDON/MELBOURNE Nov 26 (Reuters) - Mining companies, 
compelled to cut yet more costs as metal prices fall, are 
ratcheting up pressure on suppliers of  everything from diggers 
to diesel, forcing them to agree to financing deals and even 
loss-making sales to secure business. 
    The mining sector's huge supply chain -- which builds 
equipment, maintains machinery and even feeds and clothes 
workers -- has benefitted from the industry's decade-long boom. 
But commodity prices have worsened almost relentlessly since 
their 2011 peak, thanks to weaker demand and growing output, and 
that has meant tough times for both miners and their suppliers. 
    Shares in mining equipment and services firms have plunged 
22 percent this year, worse than the 13 percent fall experienced 
by metals and mining companies overall. 
    "Traditionally, the industry has taken all the risk and 
service providers have had a jolly good time. Now we demand that 
they partner in our risk," said Mark Bristow, chief executive of 
Africa-focused gold producer Randgold  RRS.L .  
    Competition among suppliers has been stiff for the last few 
years, as mining firms began to come under pressure from 
investors to cut back. They have already slashed a total of 
$20-25 billion in costs, according to Ernst & Young. 
    But a further plunge in prices this year has made the 
pressure relentless -- just at the time when the oil sector too 
is suffering, forcing its own suppliers to consolidate. 
    "For everyone, it is not life as usual anymore," said 
Russell Hallbauer, Chief Executive of Taseko Mines  TKO.TO . "If 
we are buying something for a buck and we think we can get it 
for 75 cents somewhere else, then we are going to do that." 
    For service companies, the shift to value has been 
devastating, given the high cost of many of the supply deals 
involved, often to provide or maintain expensive equipment in 
remote areas. 
    "The company... finds itself competing more often on a pure 
price basis," said Francis McGuire, president and CEO of Major 
Drilling Group International  MDI.TO , one of the world's 
largest drilling service providers, which swung into a loss in 
the first quarter. 
    "These levels of pricing are not sustainable beyond the 
medium term as it will affect the capacity of the industry to 
maintain the quality of its equipment." 
    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ 
     Graphic on performance of mining companies vs service 
providers:  http://link.reuters.com/fam53w 
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> 
     
    BEND IT, UNTIL YOU BREAK IT 
    To generate cash and avoid losing market share, some 
suppliers are selling off inventory, or accepting losses.  
    Others are looking at more inventive ways, such as financing 
struggling mining companies in exchange for future business.   
    Equipment hire firm Emeco Holdings  EHL.AX  sold about $60 
million worth of idle fleet assets in the year to June 2014.  
    U.S.-based drilling giant Boart Longyear  BLY.AX  -- whose 
clients include mining firms BHP Billiton  BLT.L  and Rio Tinto 
 RIO.L  -- recently averted collapse through a restructuring 
that gave U.S. distressed debt investor Centerbridge Partners a 
large stake in the company.  
    "Unfortunately, in Australia, we are still seeing irrational 
pricing," Terence O'Connor, the chairman of drilling and 
blasting services firm Ausdrill told shareholders. "Inevitably, 
some of these companies will go to the wall." 
    Ausdrill, with its shares near a 12-year low, has been hit 
by the collapse of one of its clients and faces tricky contract 
renegotiations. To shore up future prospects, it has helped fund 
small miners Azumah Resources  AZM.AX  and Mutiny Gold  MYG.AX  
in deals designed to give it preferred status down the track. 
    Others will also have to be creative to retain business 
going forward, or they might run the risk of being swallowed. 
    "There is maybe a larger number of suppliers that the 
industry can support now," said Mike Elliott, global mining and 
metals leader at Ernst & Young. "I do think that there will be 
some consolidation that will bring that number back." 
 
 (Additional reporting by Nicole Mordant in VANCOUVER, Susan 
Taylor in TORONTO, Aashika Jain in BANGALORE, Stephen 
Eisenhammer in SAO PAULO, Francesco Canepa in LONDON; Editing by 
Clara Ferreira Marques) 
 ((silvia.antonioli@thomsonreuters.com; +44)(0)(20 7542 1755; 
Reuters Messaging: silvia.antonioli.reuters.com@reuters.net)) 
 
Keywords: MINING SUPPLY CHAIN/