The increasing tendency for mining companies active in Australia to favour owner mining is causing no immediate concern for mid-sized contracting group Macmahon Holdings. Rather, chief executive Nick Bowen says the emerging trend has presented the company with a greater number of opportunities to source new work.
Over the past couple of years, more and more of the larger mining companies have opted to go down the owner mining path as they pursue operating cost savings, particularly at their underground operations. Prime examples include Barrick Gold at Darlot and Plutonic, Sons of Gwalia at Tarmoola and KCGM at the Kalgoorlie Super Pit.
While most contracting market watchers would argue that the trend has diminished the amount of work on offer in the already ultra-competitive sector, Bowen’s view differs. In late August, he told a media gathering assembled for the announcement of Macmahon’s annual results that the company was yet to see any adverse effects from the owner mining push.
“Following consolidation, there is certainly a move by major mining companies who operate underground to return to owner mining,” Bowen said. “There is probably also a slight trend in the opencut sector, but it’s not as great. We actually don’t see a problem with it, we see an opportunity.
“What typically happens with owner miners is they structure their business to carry out a base load of work and they fleet up to do their average production rate. Coal is the best example. We’ve been in that industry for two years now and six months ago we started our fourth operation. Every one of those is working for an owner miner where they can’t meet peak production rates. So instead of being in competition with owner miners, we’re actually providing a service to top them up.
“In the underground business, we’re doing more and more work in conjunction with owner miners. We’re finding there’s a lot of work there for us.”
These type of contracts have helped to fill a void for Macmahon, which otherwise struggled to win new mining work in 2002-2003. Revenue from both its opencut and underground divisions was significantly lower than the previous financial year as the company followed a policy of “waiting until the right work with the right margins came along”. This approach also resulted in high idle equipment costs that ate into earnings.
“Insufficient work in our mining businesses had a major impact during the year,” Bowen said. “We’ve been tendering for a lot of work, but we haven’t been able to get across the line. The feedback we’ve had from potential clients is that someone’s been prepared to do it for cheaper, but we’re sticking to our guns on the margins we require.”
Despite this, Macmahon still managed to record a profit of $8.5 million, up 20% on last year, and knock another $13 million off its debt, reining it in to $69.3 million. According to Bowen, the annual figures were positively influenced by a lower tax bill and the strong performance of the company’s civil contracting division, which has been heavily involved in the construction of the Alice Springs-Darwin Railway.
Whatever the reasons, a second consecutive year of solid earnings and significant debt reduction confirms a major form reversal for the contractor, which before 2001-2002 had posted three hefty losses and was labouring under a debt of more than $160 million.
“We’re happy to be able to announce our second year of profits since we restructured and got the company back on its feet,” Bowen said. “After three years in losses, we’re into our profit regime and that’s heading in the right direction. Most importantly we have a fairly positive outlook for the future, which is a change in our position from six months ago.”
Reasons for the newfound optimism included a “very buoyant” civil construction sector in which all state governments were spending freely, significant expansion activity to meet worldwide demand in the iron ore industry, and the re-emergence of junior mining companies as a collective force.
“It’s probably the busiest we’ve seen it for two years,” Bowen said. “We’ve got very high levels of confidence that we are going to pick up enough work in the next 6-12 months to reach our $400 million plus annual turnover target. By the end of the first quarter, we will have won probably $250 million of that. That’s very strong compared to previous years.”
Back in August, Bowen lamented the fact that Macmahon’s order book was not as full as he would like, however, as predicted, events have since transpired to rectify this. The company was recently awarded two new contracts with a combined value of $210 million, taking work in hand to $580 million, a level that sat much more comfortably with the chief executive. “The new contracts support the confidence expressed at our full year results announcement of likely success from the current strong tendering environment,” he said.
The larger of these will see Macmahon undertake development and operation of RAG Australia Coal’s Eaglefield opencut coal mine in Queensland for seven years, while the other is a two-year agreement to carry out drill and blast services at Sons of Gwalia’s Carosue Dam and Safari Bore gold mines, north of Kalgoorlie in Western Australia.
With Bowen explaining that the company’s ability to post a profit in the 2004 financial year ultimately hinged on the quality and quantity of new work won, the early tendering success was a positive sign. Australia's Mining Monthly
