Fortescue Metals Group has consolidated two service contracts at Christmas Creek, winding up Macmahon Holdings and awarding the remaining work to rival contractor Downer EDI.
The move spells trouble for around 700 workers employed by Macmahon at Christmas Creek 2.
After already dropping 40 workers from the Christmas Creek operation last week, Macmahon was informed by FMG on Friday that their contract, worth $260 million in revenue, would be wound up by April 20.
Downer EDIs contract has been expanded to include Christmas Creek 1 and 2, an agreement which will run to September 2016.
Downer EDI has said the contract is worth $720 million however FMG have stated it is worth approximately $650 million.
The contract includes drill and blast services, and load and haul of overburden and ore.
Downer EDI chief executive Grant Fenn said the contract highlighted the strength of the relationship between FMG and Downer.
FMG chief executive Nev Power said the consolidation would afford considerable productivity and efficiency gains.
“This represents another step in Fortescue’s concerted drive to increase our global competitiveness,” he said.
It is expected that FMG will be able to shave around US$3.30 off the production cost per tonne, now standing at US$30.60 per tonne, according to the West Australian.
MacMahon’s executive chairman Jim Walker said FMGs decision to reduce the contract was disappointing, but he understood the financial challenges to reduce costs faced by the iron ore miner.
Macmahon’s revenue forecast for FY15 is now between $600 and $700 million.
Walker said Macmahon would also need to restructure its business to accommodate the loss of revenue.
“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 underway and is pursuing potential opportunities both here in Australia and overseas.
“Contracting by its very nature requires the ability to flex up and down very quickly.
“Macmahon has been around for more than 50 years and has successfully done this many times during that period.”
Macmahon faces the prospect of paying back a three year Syndicated Facility Agreement of $317.5 million with nine lenders, who will reassess the loan over the next 90 days.
At present Macmahon reported having $159 million drawn with $8.9 million worth of outstanding bank guarantees.
If any lenders choose to withdraw from the facility, Macmahon will have another 60 days to repay that portion.