Much of Australia’s mining services sector and other businesses that rode the resources boom might be getting by on “life support”, but this year is shaping as a tipping point that will see company collapses increase, insolvency and industry experts say.
The mass corporate failures in the sector that were predicted as early as 2012 have not manifested and only 3 per cent of total insolvencies in financial 2014-15 related to mining, McGrathNicol transactions partner Anne-Maree Keane said. She was surprised so few formal insolvencies had materialised.
But many services companies had cut and restructured as much as possible in the last few years, and looming asset sales would change the industry.
“There is a tipping point, and because we are going to see more asset turnover by the majors we are also going to see a change in how those operations are serviced,” Brisbane-based Ms Keane said.
The new types of buyers looking to pick up assets put on the block by the likes of Glencore, Anglo American, Vale and Rio Tinto will bring new approaches that won’t necessarily bring good news for existing mining services players.
“If some of the majors do sell them, everything is up for grabs again in terms of contracting environment. A lot of players coming in and looking at assets will be private groups looking for the ultimate lean structure.”
Companies servicing the coal sector were among the most exposed, but distress in coal-seam gas in Queensland was also growing.
Scott Langdon, a Perth-based partner at KordaMentha Restructuring, said this year “will see many miners entering into care and maintenance, as opposed to some form of insolvency”. But he said collapses would still increase this year.
“While insolvencies will increase in 2016, we will see plenty of collaborative and creative structures to share risks and long-term future upside to see through the current low commodity prices.” He hoped the new “creative” approaches would “become the norm”.
A sizeable chunk of the sector was operating just to keep equipment utilised and service debt, Ms Keane said.
Operators on life support
“Low interest rates have just put some operators on life support, and as opposed to fundamentally helping the business, they are just getting by. But there has been no reinvestment in the business.”
“We expect this year a number of companies will struggle and not survive, and then there will be some winners there that will be able to pick up some of the distressed assets and contracts and grow their market share in arguably the toughest market we’ve seen in a generation.”
Mr Langdon said there were cashed-up mining services players looking to drive consolidation. “We should see sellers expectations reduce and increased M&A activity and ultimately consolidation.”
Ms Keane said that generally mid-market private players were better placed than their listed counterparts to cope with big cuts by mining houses, because they could stay largely away from the public spotlight, and had lower operating costs.
“Most exposed are companies with higher leverage, higher levels of equipment in the business that are financed – often larger public companies,” she said.
But there was a tier of ancillary companies also heavily exposed – like hire companies, pubs, hotels, property development, retailers, accommodation and transport operators.
“We are gravely concerned for the add-on businesses that are really a byproduct of the boom. I suspect we will see significant amounts of business failure there.”
In mining services, players had started to diversify their revenue base to include infrastructure and civil work, or were looking offshore. They were moving outside the mining heartlands of Queensland and Western Australia.
“Until more recently they were still hanging on to a perception that ‘it will turn, it will come around’. The difference is now that we are starting to see it play out publicly: earnings guidance is going down across the board.
“The fantasyland people have lived in, that ‘we can maintain growth, and keep putting that story out there’, is starting to catch up.
Silas Berry – AsiaConsult