The Drilling Services business provides drilling services to the mineral exploration, development and production, environmental, infrastructure and energy markets.
The Drilling Products business designs, manufactures and sells drilling equipment such as drills and support systems, as well as bits, rods and all requisite tooling.
Industry conditions worsening
The mining services sector has been battered in recent times amid concerns over China’s slowing economy.
Chinese GDP rose just 7.7% in the year to March – weaker than economist estimates. Industrial production also grew a less-than-expected 8.9% annual rate in March.
Furthermore, Chinese manufacturing activity slowed in April, signalling the weak economic growth in the first quarter is continuing into the current quarter.
A slowdown in our resources sector will have negative consequences for related industries such mining services.
Indeed, these fears are being realised with engineering services providers, UGL and Sedgman Limited (SDM) downgrading profit guidance today. Amid difficult trading conditions SDM specifically pointed to delays in mining investment approval and underutilised assets.
SDM’s downgrade followed similar profit warnings from Ausdrill (ASL) and Emeco Holdings (EHL) last month.
Although BLY is one of the more established drilling services providers in the market it is by no means immune to the currently challenging operating environment.
Following a positive start to FY12, BLY was buffeted in the second half of the financial year by a sharp slowdown in the mining cycle. Conditions have worsened since the end of 2012, with commodity prices plunging in April and no let up in sight as concerns over China mount.
Roughly two third of BLY’s drilling services revenue is linked to gold and copper. Bullion prices have eased considerably in recent months, squeezing cash margins of explorers and mid-to-small tier producers.
Copper prices have also taken a hit, down around 12% in the past three months. Lower profit margins will likely force copper and gold producers to curtail capex spending.
The implications for BLY include another weak first half result, characterised by lower revenue and earnings.
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