“Serious problem” on mining contract and trouble in Saudi Arabia gouge SNC-Lavalin shares

Shares in Canadian engineering group SNC-Lavalin plummeted almost a third on Monday after it warned that its 2018 results would be hit by a "serious problem" on a mining sector contract, and revealed an impairment charge of C$1.24bn in its Oil & Gas segment due to worsening tensions between Canada and Saudi Arabia, where 15% of the company’s global staff work.

"This isolated incident is unacceptable and I intend to take appropriate actions to mitigate the financial impacts for the Company," president and chief executive Neil Bruce said of the mining sector contract, which the company did not identify beyond saying it was awarded in 2016.

Containing only bad news, the announcement caused shares to hit C$35.25 on Monday, 28 January, down from their Friday closing price of C$48.50, a drop of more than 27% and its biggest plunge in 27 years, said Bloomberg.

On Tuesday the share price had recovered only to C$37.30 at close of trading in Toronto.

Saudi Arabia is SNC-Lavalin’s third biggest market outside Canada, netting it revenues of nearly a billion Canadian dollars (C$992m) in 2017.

In August the company warned of financial impacts from a diplomatic standoff with Canada after the Canadian foreign affairs minister called for the release of a women’s rights activist.

Relations have only deteriorated since then, the company said.

"Inter-governmental relations between Canada and Saudi Arabia, together with unpredictable commodity prices and uncertain client investment plans, have led to deterioration in our near-term prospects which we cannot ignore," it stated.

"Consequently, the impairment tests we carry out on an on-going basis indicate that the fair value of our Oil & Gas segment is lower than the carrying value in our financial statements. We will therefore be taking a non-cash after-tax goodwill impairment charge of approximately $1.24 billion, or $7.06 per diluted share."

Troubles abroad are accompanied by troubles at home, where the company faces a lengthy trial over corruption charges laid in 2015 in relation to its dealings in Libya between 2001 and 2011. Prosecutors allege the company offered millions of dollars in bribes for work.

In December Neil Bruce claimed the reputational damage from the corruption charges had cost the company more than C$5bn in lost work. It wants an out of court settlement.

Regarding the mining project problem, in a call with analysts reported by Bloomberg, Bruce declined to comment on whether it related to Chile’s Chuquicamata Copper Smelter, where SNC-Lavalin won a contract to replace an effluent treatment plant in November 2016, and another in the same month to build two sulphuric acid plants there for Chile’s nation copper corporation, Codelco.

The company has been celebrating good health and safety performance on the acid plants project, announcing on 15 January the attainment of more than 4 million man-hours worked without a lost-time incident. 

In its statement SNC-Lavalin said the unnamed project saw "substantially increased costs in Q4", and that, in addition, "we cannot meet the required level of agreement at this time with our client in order to meet the IFRS standards for revenue recognition".

"This unfavorable cost reforecast surfaced as we were closing 2018," it said, adding: "We will be aggressively pursuing our project claims through the contract protocols up to and including engaging in a dispute resolution process."

Image: SNC-Lavalin is building two sulphuric acid plants at Chile’s Chuquicamata Copper Smelter, but the company declined to say whether it was the troubled contract (SNC-Lavalin photograph)

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