Weak commodity prices continue to drag on earnings of mining service companies. Photo: Erin Jonasson
Mining service companies are facing further credit rating downgrades if they are unable to shake off their slide in earnings or cannot reduce the risks faced in refinancing their borrowings, according to ratings agency Standard & Poors.
The companies are finding it difficult to stabilise earnings as their clients - mining companies - put pressure on suppliers to cut costs and charges amid the ongoing weak commodity prices.
"Although Australian mining services companies have streamlined their operations and become more efficient, their customers in the broader mining industry are wrestling with persistent commodity price weakness," the ratings group's global ratings credit analyst May Zhong said.
"Because of the tough industry conditions, we don't expect a strong earnings recovery for mining services companies until activity in the broader mining industry picks up sustainably."
The agency rates six local mining service companies and so far this year it has taking negative ratings actions against three of them, it said.
Further, the rating outlooks exhibits a "negative bias" it said, since four of the six companies are on negative outlook which indicates the possibility of further downgrades if the decline in profits cannot be arrested, it said.
Several companies face large lump-sum debt repayments over the next few years which may need to be refinanced, the report said. The report pointed to refinancings of $2.5 billion which are due in 2018 and 2019.
"Notwithstanding mining services companies' efforts to reduce debt, their capital structures under current industry conditions may be unsustainable in the long term," the report noted.
"In particular, issuers such as Boart Longyear, Emeco Holdings, or BIS Industries, are likely to be dependent on favourable business, financial, and economic conditions to meet their financial commitments."
Investor and lender appetite towards the sector is "choppy and skittish", S&P analyst Ms Zhong said, which is "not unique to mining services but the mining sector in general".
"The size of the debt load creates refinance risks," particularly since most companies have weak earnings making it difficult to made any 'bullet' or large one-off loan repayments.
"We don't see any material improvement until the mining business cycle improves," she said.
Assisting some industry operators has been their ability to move into non-mining sectors such as infrastructure spending which has helped give them access to new revenue streams, the S&P analysts said.
