So will Leighton Holdings make a cheap mop-up bid of Macmahon Holdings after yesterday’s shock earnings downgrade?
Macmahon shares plunged by more than 47% yesterday, the biggest fall in 25 years after the contract mining and construction company cut its full-year profit forecast by almost 70% because of declining demand and activity in the mining sector.
But the company said its construction business hasn’t been impacted so far and in fact it’s looking to it to form the basis for new business in the next year.
The announcement means the company’s second half financial position is worsening daily: hundreds more jobs will be cut and it will be very lucky to earn a profit in the six months to June.
Macmahon shares fell as much as 47% to 28.5 cents in the immediate wake of the downgrade. The biggest fall since 1984, according to Bloomberg.
It later traded around 32 cents where it finished for the day with its market cap around $170 million.
Leighton Holdings own around 17% of the company and has approval under a standstill agreement to lift that to around 30%. That was negotiated over a year ago in the good times in mining and resources.
Leighton shares eased 13 cents to $19.60. It has already taken a write-down on Macmahon this financial year.
Now Macmahon directors would welcome Leighton with open arms,
But Leighton has its own problems with its contract mining business feeling the pinch and work in Asia, India and the Middle East under pressure.
But it might never have the chance again to snap up control of Macmahon at such low prices.
Macmahon told the ASX that profit for the year ending June 30 may be between $15 million and $20 million, compared with the forecast of $48 million made last December.
This means that profit in the second half is likely to be about $6 million at best and just over break-even at worst.
BHP Billiton and Rio Tinto Group are some of Macmahon’s bigger customers in WA and both have cancelled mining contracts and cut others because of the slump in demand for metals, especially nickel, iron ore and coal.
"We’ve seen very significant cutbacks across nickel, copper, uranium, diamonds and very recently in coal," said chief executive Nick Bowen.
"Adding to these issues, severe rain and cyclones in the March quarter have impacted both our mining and construction operations in Queensland’s Bowen Basin and the Pilbara region of Western Australia."
The dramatic reduction in demand had also hurt Macmahon’s business, with monthly revenue between 30 and 40 per cent lower than six months ago.
That equated to a $250 million reduction in annual revenue.
Macmahon has also frozen salaries
The reduction in staff combined with other head-office savings are expected to save about $10 million, the company said.
"Mining remains a challenging sector, with subdued market conditions as a result of continued uncertainty in commodity pricing and client difficulty in gaining access to project funding," Macmahon said in its statement.
"To date, Macmahon has seen volume reductions across most commodities including: • completion of work at the Perseverance Deeps nickel mine; • deferral of work on the Argyle diamond contract; • reductions at the Ellendale diamond mine and at Olympic Dam; and • deferral of the Sinclair underground nickel mine.
In addition, Macmahon has been advised that work at the Goonyella coal mine for the BHP Billiton Mitsubishi Alliance (BMA) will now not be extended past its April completion date due to recent changes to the mine plan.
"Last Thursday, BMA also advised the early termination of the Saraji coal contract at the end of May 2009.
"The Saraji contract was scheduled to run until February 2010.
"On a positive note, the Eaglefield coal mine is ramping up, which will utilise some equipment and a number of employees from Goonyella and Saraji.
"In contrast to Mining, Macmahon remains optimistic on the outlook for its Construction business.
"The Construction business is continuing to win work, as evidenced by the recent award of BHP Billiton’s RGP5 rail expansion contract in the Pilbara region of Western Australia.
"Ongoing government spending is supporting activity within the construction sector and Macmahon expects to benefit from upcoming infrastructure funding.
"The Company has previously advised that it is in negotiations with clients with regards to claims and variations on two construction contracts.
"Progress on these claims has been slower than expected, and they are now unlikely to be fully resolved by the end of the 2009 financial year which will impact second half."
"As a result of the lower profit and with the impact of restructuring costs, Macmahon is generating lower free cash flow.
"Gearing is currently just below 40 per cent, compared to 12 per cent at December 2008. The Company remains focused on balance sheet management.
"In this current climate, the outlook remains volatile and difficult to predict.
"The mining sector is expected to remain challenging until global demand for commodities improves.
"However, the construction sector is expected to be buoyed by the soon to be announced Federal Government infrastructure spending package.
Macmahon currently has $900 million in revenue secured for the 2010 financial year.
"This compares to approximately $1 billion secured for 2009 at this ti
