Leighton takes a $260m hit as BHP axes contract

BHP Billiton has axed a contract with Leighton, replacing the mine contractor with a smaller company as it moves to cut costs.

Leighton will prematurely stop work at the Peak Downs coal mine in Queensland two years earlier than expected, the company announced in a statement today.

BHP Billiton Mitsubishi Alliance has instead hired HSE Mining to remove overburden at the mine site, The Australian reported.

Leighton said it would be entitled to compensation for the early termination of the contract.

The company expects to lose more than $260 million of work over the next two years as a result of the decision.

As the mining boom slows, companies continue to reassess their expenditure, and it seems they have contractors in their sites.

"Against a backdrop of increasing costs and falling commodity prices, BMA continues to focus on reducing its overheads and operating costs across the business," a spokeswoman for BHP said.

In what many claim was the first sign mining contractors were to bear the brunt of expenditure slashing by resource companies, late last year Macmahon Holdings cut its earnings estimate in half for 2012-13, with CEO Nick Bowen resigning as a result.

The company, which is 20 per cent owned by Leighton Holdings, blamed earthworks productivities at its Hope Downs 4 Rail Earthworks contract in Western Australia, which was under review, and ‘‘increased uncertainty about the outlook for new construction work given recent market volatility’’ for the profit warning.

New Macmahon Holdings chief executive Ross Carroll said profit margins were getting tighter.

"We are already feeling it through some of our contract extensions – it's something we're prepared for and we'll have to manage," he said.

"Certain pockets of the industry make high margins, but I think even in a good year for us we would make a 4 per cent after-tax margin," he said. "Some of the smaller niche players have been getting very high margins.

"But if you look at Leighton, Downer and ourselves the margins are very slim. We haven't been reaping all these benefits through the boom, it tends to be the owners that do that."

Recent decisions by both Xstrata, Peabody and Yancoal to dump contractors servicing their mines has also hit the contracting industry hard.

Xstrata said it will take control of the Collinsville Coal Mine away from Thiess in 5- 6 months as it pushes for the project to turn a profit.

In a statement released by the company, Xstrata said Collinsville Mine – in central QLD – had "suffered substantial financial losses," on the back of lower coal prices, the high Australian dollar and high operational costs.

While just a day after this announcement, mining giants Peabody and Yancoal announced a joint venture agreement to take control of Middlemount mine away from service contractor NRW.

In a statement, the companies stated that because both were coal mine operators it was a ‘logical step for Middlemount Coal to become the operator of the Middlemount mine.’

Earlier this year major miners BHP Billiton and Rio Tinto both inferred they plan to cut as much as $US10 billion from operating costs over the next two years.

The cost cutting measures come as the miners attempt to deal with stabilising commodity prices, and increased investor demand for larger returns.

Last year BHP closed both its Gregory Crinum and Norwich Park coal mines in Queensland.

Image: leightoncontractors.com

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