What Happened to the Downer EDI Share Price?
Shares in engineering services contractor Downer EDI Ltd [ASX:DOW] plummeted more than 11% today, weighing down the broader industrial sector. In one day the stock has given up all of the gains it had made in the year to date.
Why Did This Happen to the Downer EDI Share Price?
Downer had a multi-year contract worth several hundred million dollars with BHP Billiton Ltd [ASX:BHP] to remove earth from above unmined coal at BHP’s Goonyella Riverside mine in Queensland.
This morning BHP announced that it will terminate the contract with effect from 9 September 2014. That’s nearly two years earlier than the originally planned completion date.
Although Downer will be entitled to some compensation for early termination, the announcement looks to kill around $360 million of work-in-hand.
That’s a material negative impact on a $2 billion company. Investors are acutely aware of the risk of similar announcements in the future, which explains today’s savage share price reaction.
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What Now For Downer EDI Ltd?
Ongoing weak coal prices are forcing miners like BHP to reset their cost bases and rein in spending on operations around the world.
This dynamic will take some time to fully play out, but given the relatively high cost of Australian mining operations, domestically-focussed mining service providers appear to be most at risk. That makes investment in this sector a challenging proposition.
Tim Dohrmann+
Small-Cap Analyst, Australian Small-Cap Investigator
