The perils of mining capital expenditure cutbacks around the world are reflected by a drop in earnings from sector specialist MDM Engineering (MDM:AIM) which today reports half-year results. Although lower profits have been long factored into analyst forecasts and valuation models, the shares still drop 4.4% to 151.5p on today's news, as investors voice their disappointment at the financial performance.


MDM is actually one of the stronger companies in the mining supply sector. It is still receiving a healthy number of enquiries and its engineering skills are in demand from miners wanting to get the most out of existing projects.


The downside is that MDM is having to undertake smaller jobs than before, so earnings will naturally be lower. Half-year profit falls 38.3% to $5 million.


Ahead of today's interims, analysts had predicted the current financial year's results would represent the trough for MDM's earnings slump. We haven't seen any new forecasts as yet, but Canaccord Genuity's existing numbers are for $12.7 million pre-tax profit in the financial year to March 2014, rising to $13 million in 2015 and $13.5 million in 2016. Although this shows progress, it is still considerably below the $20.4 million achieved in the year to March 2013.


MDM's shares have been in a rising trend for the past few weeks, helped by several contract announcements. We also drew attention to the stock in the 28 November issue of Shares. The engineer was also our only 'buy' call in our look at the mining supply chain sector – you can read that article here.


The small cap's flagship project in the current financial year is work on African Barrick Gold's (ABG) Bulyanhulu deposit in Tanzania which is due for completion in the first quarter of 2014 (calendar year). It is also working on Harmony's Kalgold plant upgrade and modifications to Gold Fields' Tarkwa plant in Ghana (pictured above).


The business may be best known for work on gold projects in Africa but it does have a wider reach with interest in uranium, copper and platinum. It has secured work on GoGold Resources' silver and gold tailings project in Mexico, which adds geographical diversification.


MDM says it expects to hit market expectations for the full-year. It comments: 'The current subdued commodities market and the weak gold price has resulted in a reduction of capital spending on new projects and rather optimising current operations. This means MDM will look to focus more on using its specialist know-how and experience to improve recoveries for clients on their existing facilities.'



Issue Date: 04 Dec 2013