2019 industry report resource services in australia...nickel (2.8) 2 heading into 2019, the outlook...
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2019 Industry Report
Resource Services in Australia
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Spending by State/Territory ($B)
Spending by Commodity ($B)
Western Australia (74.4)
Queensland (19.8)
New South Wales (10.6)
Northern Territory (1.8)
South Australia (1.5)
LNG (50.6)
Coal (21.9)
Iron Ore (14.8)
Fertiliser (4.5)
Lithium (4.0)
Other (8.4)
Nickel (2.8)
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Heading into 2019, the outlook for Australia’s resource services sector is promising as the resources industry undergoes a new growth cycle.
Projects valued at more than $108 billion and involving thousands of new jobs have been announced.
Where the money will be spent
The main beneficiaries of this expenditure are Western Australia, Queensland and New South Wales, which together represent $105 billion. With projects totalling $74 billion, WA will benefit the most - not only because of the sheer quantum, but because of the value relative to WA’s smaller economy. Most of the spend in WA will be from three LNG (liquefied natural gas) projects (two belonging to Woodside and one belonging to Chevron), totalling more than $50 billion or two thirds of the amount planned for the state.
Queensland is the second largest beneficiary with $20 billion in projects planned, $16.5 billion of which relates to the controversial Carmichael coal mine and rail project.
New South Wales will benefit from $11 billion of expenditure. Half of this comes from coal.
A new resources cycle is about to begin
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Adelaide
Melbourne
Sydney
Brisbane
Perth$1b
$0.9b
$28b
$7.6b
$15b
$1b$0.8b
$0.8b$1.3b
$16.5b
$4.7b
$3.5b
$3b
$1.9b
$1.7b
$4.5b
$2.6b
$0.8b
$1.8b
$1.3b
Browse gas project – Woodside Petroleum/Shell/BP/Japan Australia LNG/PetroChina
Gorgon subsea expansion project – Chevron
Scarborough– Woodside Petroleum/BHP
Carmichael coal mine & rail project – Adani Mining/Carmichael Rail Network
Base MetalsBauxiteCoalFertiliser MaterialsIron OreLimestone
LithiumLNGMineral SandsPrecious MetalsVarious
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1. Scarborough gas project – Operator: Woodside; Partner: BHP. LNG from this field is to be processed at the Pluto LNG plant beginning in 2023. Annual production is expected to be 4 to 5 Mtpa.
2. Browse gas project – Operator: Woodside; Partners: Shell, BP, Japan Australia LNG and PetroChina. With first production expected in 2026, the previously shelved giant LNG project is expected to produce 10 million tonnes (11% of Australia’s current annual production) of LNG per annum from two floating production vessels. The gas will be pumped 900km to the North West Shelf plant in Karratha.
3. Carmichael coal mine and rail project – Operators: Adani Mining (India), Carmichael Rail Network. The open cut and underground thermal coal project has been impacted by years of environmental and legal disputes. The project is now
proceeding at a planned production capacity of 27.5 Mtpa (10% of Australia’s current annual production), down from the 60 Mtpa planned previously. Coal will be transported by rail 300km to Abbot Point Terminal. The project is expected to create 6,000 jobs.
4. Hawsons iron ore project – Operator: Carpentaria Resources; Partner: Pure Metals. Located SW of Broken Hill, the project is expected to produce 10 Mtpa. Expected to create 1,200 jobs during construction and 500 from ongoing operations.
5. Sunrise nickel and cobalt scandium project – Operator: Clean TeQ. One of the highest grade and largest nickel and cobalt deposits outside of Africa, and one of the largest and highest grade scandium deposits in the world. Expected to create 1,000 jobs during construction and 300 from ongoing operations.
6. Kemerton lithium hydroxide plant – Operator: Albermarle. Albermarle is the world’s largest lithium producer. Located near Bunbury, the plant is expected to process 1 Mtpa of spodumene concentrate (lithium ore mineral) from the Greenbushes mine which is 49% owned by Abelmarle.
7. South Flank iron ore project – Operator: BHP; Partners: Mitsui ITOCHU. First production is expected in 2021. The 80 Mtpa from the project will replace the iron ore currently sourced from the Yandi mine, which is reaching the end of its economic life. The project will generate 2,500 construction jobs and 600 ongoing operational roles.
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1
3
4
5
6
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Source: company media reports.
Iron Ore Historical and Forecast Production (Mt)
1,000
750
500
250
0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
E20
20E
Western Australia Australia
LNG Historical and Forecast Production (Mt)
80
60
40
20
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
0
2019
E20
20E
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The benefits for the country
Why does the next mining cycle matter? It is important for two main reasons:
Firstly, it will cause commodity production levels to grow further, which in turn increases the size of Australia’s economy. In the last cycle, production levels of commodities such as iron ore, coal and LNG increased significantly.
Between 2008 and 2018, iron ore, coal and LNG production levels grew 185%, 37% and 335% respectively. In 2018, the resources and energy sector represented 8.2% (approx. $82b) of the country’s GDP.
Source: Office of Chief Economist - Department of Industry, Innovation and Science
Source: Office of Chief Economist - Dept of Industry, Innovation and Science, WA Dept of Treasury
Coal Historical and Forecast Production (Mt)
400
500
300
200
100
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
0
2019
E20
20E
400
500
300
200
100
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
0
Copper Historical and Forecast Production (kt)
2019
E20
20E
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Secondly, it will have a significant effect on the resource services industry that depends heavily on project development expenditure and continued growth in production levels. In the past 18 months, the share price growth of resource services companies has outperformed the market, predominantly due to the prospect of this growth.
In terms of share price performance, Australia’s resource service companies turned the corner at the end of 2015 and have more than doubled in value since then. Their recovery coincides almost perfectly with the movement in commodity prices as shown by iron ore, coal and copper. Although one step down the food chain, the market views the fortunes of resource contractors as being highly correlated with commodity prices.
Source: Office of Chief Economist - Department of Industry, Innovation and Science
Source: Office of Chief Economist - Department of Industry, Innovation and Science
7/1/
2014
8/11
/201
49/
19/2
014
10/2
9/20
1412
/9/2
014
1/22
/201
53/
5/20
154/
20/2
015
5/29
/201
57/
10/2
015
8/20
/201
59/
30/2
015
11/9
/201
512
/20/
2015
12/2
0/20
152/
2/20
163/
14/2
016
4/28
/201
66/
8/20
167/
20/2
016
8/30
/201
610
/9/2
016
11/1
7/20
161/
2/20
172/
13/2
017
3/26
/201
75/
10/2
017
6/21
/201
78/
1/20
179/
11/2
017
10/1
9/20
1711
/29/
2017
1/14
/201
82/
25/2
018
4/10
/201
85/
22/2
018
7/3/
2018
8/13
/201
89/
21/2
018
10/3
1/20
1812
/11/
2018
Avior Mining Services Index ASX200
200.00
150.00
100.00
50.00
0
As commodity prices turned the cornerat the end of 2015, so did resource services.
Resource Services - Share Price Performance
Upturn
Jan
2000
Jun
2000
Nov
200
0Ap
r 200
1Se
p 20
01Fe
b 20
02Ju
l 200
2D
ec 2
002
May
200
3O
ct 2
003
Mar
200
4Au
g 20
04Ja
n 20
05Ju
n 20
05N
ov 2
005
Apr 2
006
Sep
2006
Feb
2007
Jul 2
007
Dec
200
7M
ay 2
008
Oct
200
8M
ar 2
009
Aug
2009
Jan
2010
Jun
2010
Nov
201
0Ap
r 201
1Se
p 20
11Fe
b 20
12Ju
l 201
2D
ec 2
012
May
201
3O
ct 2
013
Mar
201
4Au
g 20
14Ja
n 20
15Ju
n 20
15N
ov 2
015
Apr
201
6Se
p 20
16Fe
b 20
17Ju
l 201
7D
ec 2
017
May
201
8O
ct 2
018
Iron Ore (USD/tonne)
200
150
100
50
0Upturn
Coal (USD/tonne)
200
150
100
50
0
Jan
2000
Jun
2000
Nov
200
0Ap
r 200
1Se
p 20
01Fe
b 20
02Ju
l 200
2D
ec 2
002
May
200
3O
ct 2
003
Mar
200
4Au
g 20
04Ja
n 20
05Ju
n 20
05N
ov 2
005
Apr 2
006
Sep
2006
Feb
2007
Jul 2
007
Dec
200
7M
ay 2
008
Oct
200
8M
ar 2
009
Aug
2009
Jan
2010
Jun
2010
Nov
201
0Ap
r 201
1Se
p 20
11Fe
b 20
12Ju
l 201
2D
ec 2
012
May
201
3O
ct 2
013
Mar
201
4Au
g 20
14Ja
n 20
15Ju
n 20
15N
ov 2
015
Apr
201
6Se
p 20
16Fe
b 20
17Ju
l 201
7D
ec 2
017
May
201
8O
ct 2
018
Upturn
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Source: MarketIndex.com.au/thermal coal - Australian thermal coal
Source: MarketIndex.com.au/iron-ore - Fines 62% FE spot
Source: au.finance.yahoo.com. Avior Mining Services Index - composite index of 31 resource services companies
Gold (USD/oz)
2,000.0
1,500.0
1,000.0
500.0
0
Jan
2000
Jun
2000
Nov
200
0Ap
r 200
1Se
p 20
01Fe
b 20
02Ju
l 200
2D
ec 2
002
May
200
3O
ct 2
003
Mar
200
4Au
g 20
04Ja
n 20
05Ju
n 20
05N
ov 2
005
Apr 2
006
Sep
2006
Feb
2007
Jul 2
007
Dec
200
7M
ay 2
008
Oct
200
8M
ar 2
009
Aug
2009
Jan
2010
Jun
2010
Nov
201
0Ap
r 201
1Se
p 20
11Fe
b 20
12Ju
l 201
2D
ec 2
012
May
201
3O
ct 2
013
Mar
201
4Au
g 20
14Ja
n 20
15Ju
n 20
15N
ov 2
015
Apr
201
6Se
p 20
16Fe
b 20
17Ju
l 201
7D
ec 2
017
May
201
8O
ct 2
018
Upturn
Copper (USD/tonne)
10000.0
7500.0
5000.0
2500.0
0
Jan
2000
Jun
2000
Nov
200
0Ap
r 200
1Se
p 20
01Fe
b 20
02Ju
l 200
2D
ec 2
002
May
200
3O
ct 2
003
Mar
200
4Au
g 20
04Ja
n 20
05Ju
n 20
05N
ov 2
005
Apr 2
006
Sep
2006
Feb
2007
Jul 2
007
Dec
200
7M
ay 2
008
Oct
200
8M
ar 2
009
Aug
2009
Jan
2010
Jun
2010
Nov
201
0Ap
r 201
1Se
p 20
11Fe
b 20
12Ju
l 201
2D
ec 2
012
May
201
3O
ct 2
013
Mar
201
4Au
g 20
14Ja
n 20
15Ju
n 20
15N
ov 2
015
Apr
201
6Se
p 20
16Fe
b 20
17Ju
l 201
7D
ec 2
017
May
201
8O
ct 2
018
Upturn
8
Source: MarketIndex.com.au/gold
Source: MarketIndex.com.au/copper - Grade A, LME spot price
15%10%5%(5%)(10%)(50%)
50%
Boom Logistics
AustinEngineering
Downer EDIWorleyParsons
NRWCardno
Mastermyne
Imdex
Lycopodium
Southern Cross Electrical
RPM Global
Decmil
BSA
MACA
Monadelphous
GR EngineeringCIMIC
Engenco
McMahon
Fleetwood
Logicamms
MitchellServices
Emeco
AusdrillSwick MiningServices
(25%)
25%
Less Gearing
LowerProfitability
HigherProfitability
More Gearing
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Relative financial placement
Our universe of contractors was more profitable in 2018, improving upon the generally break-even or loss outcomes of the previous year.
The cost structures now in place, after restructurings and impairments, mean that our operators are better-positioned to profitably complete the contracts they win.
Source: company annual reports, Australian Stock Exchange.
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Contractors that have improved their earnings and strengthened their balance sheets are in an enviable position.
Not only are their processes and systems robust enough to ensure that contracts should be delivered efficiently - with few earnings opportunities lost - but should the need arise, capital (debt, equity or both) will be eagerly offered up to fund further growth.
The same cannot be said for businesses with higher debt loads or lower profits. Higher debt means obtaining more debt capital to fund growth will be harder. Low profitability, on the other hand, indicates weaker competency in delivering contracts on budget. For such operators, celebrations on winning a large contract may be short lived, as the burden of sourcing capital to fund the contract becomes apparent.
Operators with both problems are in the worst position. The pressure to cover costs means less selectivity when tendering and greater willingness to cut margins. Capital to fund growth or even maintain existing plant will be more expensive or perhaps unavailable. Recent history tells us businesses in these circumstances often do not survive.
Time will tell which companies compromise their position to win revenue, only to find that they have created a toxic position that could threaten their survival.
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Profits will not be as easy
In the last resources construction boom, capital expenditure was relatively high and many major projects were compressed into the same timeline.
The result was dramatic cost blowouts on almost every major project. Indications are that resource companies will place much greater emphasis on cost control this time around - and furthermore, spending from the previous super-cycle means that infrastructure is already in place to support many projects. Chances for easy profits will therefore likely be rare. In this environment, contractors should be careful when forecasting margins on new work and planned margin growth should be viewed cautiously.
Subcontractors eagerly seeking to offer their services need to understand that the dangers for them are not abating, and they will be leaned upon by the providers further up the chain. Significant improvements in debtor ageing are unlikely and approval of contract variations will remain a challenge.
Making the most of the opportunities
In our experience, there are five key areas that will require diligent consideration during this next growth phase:
1. Revenue pipeline
The pursuit of revenue consistency, coupled with predictable growth will again be put to the test. How will the operator manage expansion in the scale of its operations? Major increases in project revenue can cause significant increases in working capital requirements, which may be difficult to fund. The corollary of this is that major reductions in project revenue require swift action to cut expenses that can be difficult to reduce.
Revenue consistency is achieved by having an active tendering capability, with a good understanding of upcoming opportunities categorised as either won, tendered or blue sky. Near-term blue-sky revenue in the forecast should put management on alert for the imminent need to reduce costs.
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2. Counterparty risk
Where does the operator sit in the supply chain, and what counterparty risks may be involved? This is not simply considering the creditworthiness of its customers. What suppliers are the operator dependent on to provide its service, and what plans are in place if those suppliers fail to deliver? Resource service contracts frequently include damages provisions for delays that may be outside of the operator’s control.
3. Awareness of major cash flow drivers
Resource services contractors tend to work with a small number of large customers. Individual issues can therefore have a disproportionate effect on cash flow, and it is vital that companies understand their major cash flow drivers. Examples include:
a. Key equipment that is a major generator of revenue and cash flow. For example, in open pit mining the main excavators, which will be few in number, effectively control the speed of operations and often cannot easily be replaced if they break down. A mechanical failure on such a key piece of equipment can have a dramatic effect on cash flow and profitability.
b. Many resource services providers are people-intensive businesses, and this creates a cash flow profile with relatively large taxation commitments relating to GST and PAYG. In times of restricted cash flow, these commitments are often redirected and instead used to help fund the balance sheet. If these commitments are not paid regularly, they quickly become major issues for the company. Concealing the problem by not lodging activity statements can also personally expose directors.
c. Major contracts may include counter-intuitive default provisions that require a contractor to continue performing under the contract even in the event of non-payment. Mitigating this risk requires a clear understanding of timing and terms of payment.
d. It is common for resource services contractors to use equipment finance debt to part-fund the balance sheet. These debt parcels are often scheduled to be repaid over a short period of time that should be supported by tenure of contracts. If contract terms change during the life of the equipment finance facility, resource services operators can find themselves unable to service the original repayment schedule. It is vital for companies to understand the repayment profile of their equipment finance facilities, and the equipment that becomes unencumbered after completion of each facility.
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4. Capturing variations
In conducting resource services works, contract variations frequently arise where the work to be undertaken differs from the original expectation. Often, resource services contractors tender for contracts with extremely slim profit margins on the basis that significant variations are likely to arise, and the profitability on variations is much higher than the original contract works.
Contracts typically provide a procedure for the approval and assessment of work to be undertaken outside the original contract schedule. It is critical that resource services contractors follow the contractual procedure for approval and assessment of contract variations; however, this is often where there is a disconnect between on-site and head office management. A full understanding of the customer’s formal approval policy relative to de facto on-site conduct is vital.
5. Contract delays
Resource services contracts usually include a schedule of how long the contract works should take, and there may be contractual consequences for any delay to this schedule. One of the most common causes of delay is adverse weather conditions and contracts usually outline which party accepts the risk of weather delays. Even if the contractor is not liable for delays caused by inclement weather, there will be a contractual procedure to be followed. If it is ignored, it can cause significant dispute at the conclusion of a contract as to which party is liable for the delay.
The contractor should be clear as to whether it has accepted weather risk in a given contract. If it has, how will inclement weather conditions impact cash flow? If it hasn’t accepted any weather risk, is it following the contractual procedure to agree weather delays in the schedule?
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2019 for resources services
We expect 2019 to offer Australia’s resource services companies numerous growth opportunities. As a group, the sector is better prepared to exploit these opportunities than a year ago. However, indications are that this growth phase will be very different from the previous one; profits will not come as easily, and expenditure will be more closely controlled.
In this exciting environment, disciplined management of the key areas above has never been more important.
To discuss how to ensure your business is best positioned for the next growth cycle, please contact us.
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Barangaroo International Towers Sydney
100 Barangaroo Towers, Sydney NSW 2000
Tel +61 2 8114 4400
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