Mining contractors back in business after 10pc rise in spending

After five or so years in the doldrums, things are finally looking up for Australia’s mining services sector with a significant expected uplift in mining and infrastructure spending this financial year, according to new research.

Wealth management group Ord Minnett has reported mining and infrastructure contractors should benefit from a more than 10 per cent rise in mining capital expenditure as well as a boom in infrastructure spending on Australia’s East Coast this financial year.

“We estimate FY17 Australian mining capital expenditure levels were one-third of FY12’s peak, falling from 35 per cent to 13 per cent of sales,” Ord said in its research note.

“We believe these markets have troughed, with FY18 looking likely to grow more than 10 per cent, although competition will likely restrict margin growth.”

The mining services sector provides specialised services for mineral exploration, extraction and distribution.

This includes equipment manufacturers; engineering services; mine software products and other related equipment, services and technologies where the primary function is to support the mining and mineral extraction industries.

Renewed optimism in mining services is thanks to an uplift in commodity prices on the back of higher demand for metals which in turn sees more investor interest in the mining sector, more money being raised and more drill rigs out in the field.

Pick of the contractor bunch

Of Australia’s listed contractors, Ord believes RCR Tomlinson is one to watch out for, initiating coverage with a Buy recommendation and a target price of $5.08.

Ord’s reason is its exposure to the solar market where it sees tremendous opportunities and where RCR has won close to $1 billion in work.

Last month, RCR reported FY17 revenue of $1.3 billion, up 45 per cent on previous year, and a record order book of $1.4 billion, up 40 per cent on 2016.

In its order book, RCR has over half a gigawatt of large-scale solar projects and more than a gigawatt is currently being progressed under Early Contractor Involvement processes.

Construction giant CIMIC Holdings is another one to watch. While Ord has forecast strong earnings growth on the back of transport-related infrastructure and international opportunities, Ord has maintained its Hold recommendation on grounds there was not enough upside to justify a higher rating. Despite this, Ord raised its target price for CIMIC to $44.11.

Engineering services firm Monadelphous Group is expected to benefit considerably from a boost in oil and gas construction and is well positioned to benefit from recovering mining capex, Ord said. Ord resume coverage of Monadelphous with a Hold recommendation and a $14.30 target price.

However, despite the positivity creeping back into the sector, there have been some recent failures.

Earlier this week, mining services and infrastructure provider Brierty was suspended from ASX trade after announcing KPMG had been appointed as administrators.

Shares in RCR closed yesterday at $4.15, while CIMIC ended at $43.35 and Monadelphous finished at $14.58.