Shares in struggling mining contractor and civil engineer, Macmahon Holdings (MAH) will come under renewed pressure this morning after it lost a major, multi-million dollar iron ore mining contract with Fortescue Metals Group (FMG).
Less than three weeks after revealing up to $135 million in impairments on goodwill, equipment and other assets other assets Macmahon has been hit by the loss of $780 million worth of work at a key FMG iron ore mine in Western Australia.
Fortescue consolidated the two contract mining contracts for Christmas Creek with the aim of saving millions of dollars a year and slashing mining costs.
The winner of the rearrangement of the contracts is Downer EDI (DOW), the other contract miner at Christmas Creek. The loss of the contract will hit hard at Macmahon, being its largest deal, with three years to run.
The loss will cause added financial pressures for the company and the shares will come under pressure when trading starts later this morning.
Macmahon shares fell 1.7% on Friday to close at 5.6 cents. They company is due to release its half year later today.
MAH 2Y – No respite in mining services
In statements released to the ASX late on Friday night, Fortescue told Macmahon it would be ending the contract at the Christmas Creek iron ore expansion project in the Pilbara by April.
That contract and one other have been consolidated into one agreement worth $650 million, and Downer EDI was named as the winning company.
Loss of the contract will leave 700 Macmahon workers at Christmas creek with uncertain futures. While some are expected to be re-employed by Downer, jobs in maintenance, support and management are expected to be lost.
The Christmas Creek contract generated $260 million a year in revenue for Macmahon and then company said at the weekend the loss would cut its annual turnover to between $600 and $700 million a year.
It plans to hold talks with lenders to discuss the loss of income and renegotiate its banking facility if required and executive chairman Jim Walker said in the weekend statement, Macmahon would quickly restructure its business model to cope with the loss.
“We have already begun the process of resizing the business, including consolidating our Perth offices and reducing overheads," he said.
“While the business will be smaller over the near term, the company still has several quality contracts under way and is pursuing potential opportunities both here in Australia and overseas," he said.
It is the second time Macmahon has lost a major contract to Downer EDI. In January it lost a $2 billion coal mining contract in Queensland.
Fortescue expects to save as much as $US15 million ($19 million) a month, or up to $US270 million over the remaining life of the contract.
Fortescue produces about 59 million tonnes of ore a year at the mine, according to analysts, meaning the company can expect to more than $US3 a tonne from production costs.
Downer shares fell 0.4% to $4.28 on Friday, while Fortescue shares lost 2.4% to $2.45.
