Dryblower hears the Forge bell ring … and then ring again

NO one rings a bell when markets change direction. What often happens is that a single event causes investors to think a bit deeper, which is what Dryblower did when BlackRock was unveiled as a heavy trader of shares in Forge Group.
Dryblower hears the Forge bell ring … and then ring again Dryblower hears the Forge bell ring … and then ring again Dryblower hears the Forge bell ring … and then ring again Dryblower hears the Forge bell ring … and then ring again Dryblower hears the Forge bell ring … and then ring again

 

Tim Treadgold

For a modest outlay of a few million dollars, which counts as petty cash for the world’s biggest money manager, BlackRock sent a clear signal that it has redeveloped an interest in the mining (and mining services) sector – but remains more interested in a fast profit.

BlackRock’s first step into Forge appears to have been heavy buying of shares late last year in a business that has stumbled badly, with Forge posting heavy losses on troubled contracts.

News of the losses frightened investors, who dumped Forge shares by the bucket load, driving it down from $A4.18 just before the bad news was revealed in November to an astonishing low of 28.5c on relisting – a spectacular fall of 93% in less than a month.

BlackRock, from what has been reported and from tracking the heavy late November trade in Forge, appears to have soaked up the stock, enjoyed the remarkable recovery from that low of 28.5c to $1.42 (398% in a month) and then made a timely exit, pocketing a fat profit on the way out.

What becomes interesting is not so much the astute share trading of BlackRock, but the fact that it had the courage to buy into Forge when others were selling, and then the profit-focus to sell at a time when the mob started to return.

Forge, it seems, was a dramatically oversold opportunity. But the entry of BlackRock, and now the entry of secondary purchasers of the stock, could be the signalling a revival in mining and mine services.

To even make such a suggestion may be tempting fate in the hope that the worst of the downturn is over, but BlackRock’s in-and-out adventure on the Forge share register is the most optimistic sign of the past 12 months that a bottom has been reached and the way ahead is up – slowly, but up, nevertheless.

Of course, it is possible that BlackRock (and the new owners of its parcel of Forge shares) have got it wrong and the engineering contractor may stumble deeper into trouble, despite winning a swag of fresh contracts. Hopefully, that is not the case.

What’s been happening over the past few weeks is the latest twist in a series of bizarre events in the life of Forge, a business literally “forged” out of a number of once-independent contractors in an attempt to create a sort of one-stop mine services business.

An ambitious undertaking at the best of times, the official aim of Forge management is to be “a fully integrated, multi-disciplinary engineering, procurement and construction service provider” delivering all sorts of “solutions” to the power, infrastructure, mining and oil industries.

Dryblower has been around long enough to have seen that sort of one-stop-shop approach to service provision many times. While it may work one day, he’s reasonably confident to say that it hasn’t worked yet.

Why the one-stop-shop approach fails in engineering contracting is for one, or more, of the following reasons, with management either:

Biting off more than the company can chew by taking on too much work.

Underbidding in order to win a contract.

Losing sight of financial controls.

Failing to recruit skilled professionals to administer a contract, or

Being too busy with other matters to see the problems in a freshly acquired new business.

Precisely what went wrong at Forge, or who’s to blame, is yet to be fully explained, but it seems that the final issue listed above is what caught management on the hop, with the official excuse being problems with contracts won by a subsidiary before Forge bought it.

In other words, Forge management bought a business without full understanding what it was buying, or a problem was well hidden from view – matters that Dryblower suspects will be the subject of interesting future legal discussion.

So much for what went wrong at Forge. Now for what may be going right, starting with someone at BlackRock running their own due diligence over the company and deciding that its problems can be fixed, contract losses managed and profits generated.

Landing a large slice of the next phase of work on the Gina Rinehart-led Roy Hill iron ore project is a big step in repairing Forge’s financial position – assuming that the contract can be managed profitably.

But whether the Roy Hill work is marginal or fabulously profitable is not the point about the Forge/BlackRock relationship, which is all about a team of professional money managers committing some of the funds they administer to what has been a deeply unloved sector of the stock market over the past year.

The question now is whether BlackRock’s new-found interest in mine services contracting is a one-day wonder or whether it signals the start of a more substantial revival of interest in the many facets of the mining industry.

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