Rough road ahead for Downer EDI

Contractor Downer EDI indicated it will lose as much as $650 million in revenue in its mine services sector in the wake of the downturn in the mining industry.

It said the 2014 financial year could prove difficult in part due to this.

The SMH reports half the income loss was because of the company losing two Peabody Energy contracts. But company CEO Grant Fenn said this would have “no profit impact”.

The company will prevent a significant fall in revenue through cost cuts within the company, contract extensions and contract variations.

Peabody Energy recently axed more than 400 contractor jobs across its coal mines as it carried out a “repositioning and improvement” program to cut costs.

According to Fenn, the company forecasts a flat net profit of about $215 million for fiscal 2014.

He added the company will continue cutting costs by increasing productivity, and increasing savings through other means like more joint procurement

Reduced interest rates should help ease demands on margins and decreased borrowings will bring down interest charges.

Downer EDI’s net profit for this year to June stood at $203.98 million, up from $107.51 million the year before. Earnings a share increased to 45.7c from 23.7c.

The surge was booked on revenue of $8.4 billion, an increase from $7.9 billion.

“This result is a great outcome in the current environment. We are one of the few companies in the sector to deliver guidance,” Fenn said in a statement.

Downer has $19 billion worth of works in the offing but with an increase of around $1.3 billion in infrastructure, which will be counterbalanced by a dip in mine service revenue by around $650 million and the rail sector revenue by around $590 million.

Downer recently won $230 million in blasting contract extensions. The company won the three year contract extensions through its subsidiary Downer Blasting Services with Yancoal, Sojitz Corporation and Saracen Mineral Holdings.

“It is competitive. We do see margins a little tighter, with the focus on execution” to help counteract the pressure,” Fenn said.

“We’re not gloomy,” he said about the future of the business.

Downer is anticipating large amounts of cash to be untied from the Waratah train construction project. The company forecasts $60-$65 million in cash in 2014, and this is expected to surge to $150-$160 million in fiscal 2015. The company also expects revenue will rise this financial year.

“We won’t recover the losses [on the Waratah contract] but it will be a platform for our future railway business,” Fenn told analysts.

Downer recently cut 100 jobs at Fortescue Metals Groups’ Christmas Creek iron ore mine in the Pilbara.

It also cut 185 jobs from BMA’s Goonyella Riverside coal mine in Moranbah and another 106 jobs at the Boggabri coal mine in April.

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