Shares in mining equipment provider Bradken Ltd [ASX:BKN] saw more than 7% of their value wiped out today. At $3.62, Bradken shares are now languishing close to five-year lows.
This morning the company warned that its earnings for the year ending 30 June 2014 would be significantly lower than it had previously forecasted.
Australia’s mining services companies have endured a tough run in the years since investors started factoring in a cooling resources sector. But today’s announcement from Bradken underlined just how challenging this market is for companies whose fortunes are linked to the booms and busts of mineral wealth.
Bradken has had to cut its costs dramatically to stay viable. Today the company announced a once-off restructuring charge of $51.4 million before tax in the current financial year. Most of that charge relates to redundancy costs…and on the flipside, most of Bradken’s future cost savings will come from having a smaller workforce.
Markets will often give companies the benefit of the doubt when they announce one-off charges like this. But when they’re accompanied by a profit downgrade and a statement that the company foresees no short to medium term improvement in its markets, investors tend to take that as a pretty bad sign.
You should view Bradken shares as a high-risk investment. It’s hard to accurately forecast the extent to which mining activity will slow down, and when companies in this sector are going through a phase of lowering investors’ expectations, it’s the ‘picks-and-shovels’ mining services companies whose share prices get crunched harder than the big boys like BHP Billiton Ltd [ASX:BHP] or Rio Tinto Ltd [ASX:RIO].
But as soon as investors see light at the end of the tunnel, mining services stocks like Bradken should rebound in a major way. It’s more a case of ‘when’ rather than ‘if’.
It takes plenty of ticker to wade in and buy these stocks when they’re on their knees. But investors who time the cycle correctly can make great profits in stocks like Bradken.
Tim Dohrmann+
Small-Cap Analyst, Australian Small-Cap Investigator