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.
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. “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, 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.”
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 sold about $60 million worth of idle fleet assets in the year to June 2014.
U.S.-based drilling giant Boart Longyear — whose clients include mining firms BHP Billiton and Rio Tinto — 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 and Mutiny Gold 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)