Tuesday 11 July 2017 by Mary Anne Low Company updates

Barminco awarded extensions of two major contracts

Barminco Limited has been awarded a three year extension to two existing contracts at Western Areas’ Forrestania Nickel Operations (FNO) in Western Australia

The contract extension, estimated at AUD236m, covers mining services and diamond drilling at FNO’s underground mines:

  • Flying Fox – where  Barminco has been the incumbent mining services contractor, providing 15 years of continuous service since the mine commenced operations in March 2015
  • Spotted Quoll – with Barminco providing over five years of services since the mine first opened in May 2011

We view these contract extensions as credit positive, reaffirming Barminco’s ability to renew existing contracts and its long standing positive working relationship with Western Areas.

This positive news follows the recent loss of one of Barminco’s largest contracts, the Kundana gold mines from the East Kundana Joint Venture (EKJV) (comprising 51% Northern Star Resources, and collectively 49% Rand Mining and Tribune Resources). The three year contract was valued at AUD275m and had two more years to run. Barminco and Northern Star Resources were unable to agree on new rates following a change to the scope of work being performed at Kundana, according to The West Australian news service.

Following the contract loss of the Kundana gold mine project, on 2 June 2017 Moody’s placed Barminco Holdings Pty Limited’s corporate family rating on review for downgrade, and the ratings of Barminco Finance Pty Ltd’s senior secured notes and senior secured revolving credit facility. The rating agency cited lower forecast earnings and resulting weakening in Barminco’s credit metrics, following the contract loss will pressure Barminco’s adjusted debt/EBITDA to over 4.0x and beyond Moody’s rating driver of 4.25x as set for its current rating level.

Moody’s stated that its ratings:

“review will focus on i) Barminco's renewal of maturing contracts and its ability to secure new contracts, ii) earnings expectations in light of the current operating environment, and iii) the susceptibility of existing contracts to similar termination risks.”

S&P, on the other hand, did not take any actions on Barminco’s ratings or outlook following the contract loss. S&P expects Barminco’s debt to EBITDA to trend around 4.5x, stating:

“Whilst the contract loss moderates our view of earnings growth, however we expect the company will maintain metrics within our outlook trigger of funds from operations to debt of above 12%. The contract did not contribute a material amount of earnings during the ramp up phase and as such we do not believe earnings will be materially different from fiscal 2016.”  

A link to Barminco’s contract extension announcement is available here.  
*The Western Australian news article can be found here.

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