More pain expected for mining industry, expert warns

Insolvency experts are predicting more pain to come over the next six to 12 months as the shakeout in Australia's mining sector takes hold.

Restructuring firm Ernst & Young is expecting to see more receiverships and distressed sales as miners end their investment and construction phase to focus on production.

The forecast comes after almost half of the listed companies exposed to mining services issued profit downgrades as projects are deferred and market conditions falter.

Ernst & Young's Asia Pacific leader of mining and metals transactions, Paul Murphy, told AM the slowdown in mining is starting to reverberate in the sector, especially among companies with high debt

"I think that's inevitable. I think things grew so quickly as all the mining companies were looking at growth at all costs," he said.

"A lot of inefficient companies went along for the ride with that. And some companies that have the higher debt levels and are more vulnerable than others, there will be a rationalisation period that occurs and some will become insolvent and go to the wall.

"Overall it is a bit of a correction in some ways that had to happen. What tends to happen during these periods of rationalisation is that longer-term the industry becomes stronger and better able to withstand these shocks to slow-downs and capital expenditure."

The Reserve Bank has repeatedly warned that mining investment will peak earlier than expected and that other sectors of the economy are not taking over quickly enough.

The transition is also hostage to the fortunes of China, which is undergoing a growth slowdown from double digit pace to the current 7.5 per cent.

Mr Murphy says the recent political uncertainty and the restoration of Kevin Rudd as Prime Minister has contributed to mining sector instability even though the slowdown began a year ago.

"Like any sector really, uncertainty in the political sphere or the regulatory sphere creates a period of uncertainty for the sector and so people tend to delay and defer investment decisions," Mr Murphy said.

He says while capital expenditure in mining is expected to fall by as much as 20 per cent, there will be winners as well as losers.

"Players that are more diversified, that have stronger tender and management practices are going to be in stronger positions," he said.

"That means that the players that don't exhibit those characteristics - they're not diversified, they might have one contract, they tend to have weaker management and tender practices - are going to be more vulnerable.

"It just depends how quickly this slow-down in [capital expenditure] takes hold. So hopefully a lot of these smaller players will be able to reposition, do something about their debt and not necessarily go to the wall. "

Ernst & Young's analysis shows 49 per cent of listed companies which generate revenue from mining services have issued profit downgrades in the past six months - more than third in the past three months.

The study shows the market capitalisation of the 84 listed mining services companies has fallen 16 per cent in the year to June.

The performance of mining companies is expected to be a major focus of the the upcoming reporting season as investors seek to identify winners and losers.