Boart Longyear announced a disappointing first-half 2013 result, incurring an operating net loss after tax, or NPAT of USD 60 million, after reporting a profit of USD 98 million in first-half 2012. In addition, Boart incurred USD 269 million of post tax, mainly non-cash restructuring charges and asset impairments. The result reflected a weak operating environment with significantly reduced demand for drill rigs and related consumable drilling products.
The large earnings volatility is due to the majority of work coming from mining companies focused on the exploration and production of base metals, where activities are leveraged to commodity price movements. Demand and supply factors in the global drilling services and drilling equipment markets will always be very volatile and cyclical, with rapid changes having a considerable impact on Boart’s earnings.
Morningstar has lowered its fiscal 2013 NPAT forecast to a loss of USD 57 million from a profit of USD 25 million. We are forecasting a loss of USD 11 million in fiscal 2014 and have downgraded our long-term forecasts by 19% to 20%. The share price is trading below our fair value, with the market concerned about further earnings downgrades beyond those factored into our assumptions. We caution in the current uncertain and challenging trading conditions it is very difficult to forecast future earnings. Boart will potentially breach financial covenants under existing debt facilities at the end of December 2013. To prevent this situation occurring the company is planning to undertake major refinancing within the next three months.
In June, Boart announced its second earnings downgrade for fiscal 2013, forecasting earnings before interest, tax, depreciation and amortisation, or EBITDA, would be around USD 176 million. Two months later, Boart has further reduced expectations, indicating EBITDA will be around the USD 116 million, 34% lower than previous guidance. The operating environment continues to deteriorate for mining service companies, with commodity price weakness and slowing Chinese economic growth resulting in only limited demand for drill rigs.