Write-downs expected as Costain confirms talks on mining sale

THE City is braced for significant housing and property write-downs from Costain, the construction group, after its confirmation that it is in negotiations to sell its Australian mining business.

Costain had been planning to float a minority stake in the Australian mining business, but said yesterday that it was 'considering its options' having been approached by several parties interested in acquiring the whole operation. It would not give details, but said a further announcement would be made next month.

Analysts expect the business to fetch about pounds 120m and give rise to a profit on disposal of about pounds 50m. That would make it easier for the group to write off substantial sums - possibly as much as pounds 50m - against its housing landbank and its investment in Spitalfields, the proposed development east of the City in which it has a one-third stake.

Costain has provided pounds 77m against its landbank in the last three years, but its average plot cost - pounds 22,000 or 30.6 per cent of the average selling price - is higher than most of its competitors. One analyst said it could write off between pounds 20m and pounds 30m in its full-year figures. Its investment in Spitalfields is pounds 65m, although only pounds 10m of that is on-balance sheet, but the depressed state of the property market means substantial provisions are likely to be needed.

The sale will, however, substantially reduce the group's debt which stood at pounds 240m at the end of June, up from pounds 206m at the year-end, with a further pounds 52m of off-balance sheet debt relating to Spitalfields. Without the sale, analysts had not expected a significant reduction by the year-end.

The announcement about the Australian sale came as the group revealed that taxable profits in the first half of the year fell from pounds 5.7m to pounds 2.5m. Tax and minority interests pushed it into a 1.3p loss per share (1p earnings) and it has passed its interim dividend (4.75p) to 'conserve cash resources'. The shares closed down 2p at 27p.

Profits from the Australian mining business fell, largely because 1991 had been exceptionally good, as volumes fell from 3.9 million to 3.2 million tons. That was partly compensated for by a better performance in the troubled US mining side. Overall, mining profits fell from pounds 17.2m to pounds 14.3m.

Peter Costain, chief executive, said the group planned to invest about pounds 30m in US mining in the next two years to improve productivity. The Australian sale will free resources for this.

Housing and commercial property continued to make losses, although these were reduced from pounds 4.2m to pounds 2.6m. Mr Costain said that this week's interest rate cut would make 'little difference'. The number of houses sold rose from 138 to 168, but average selling prices fell 8 per cent and could fall further in the second half. Provisions against the landbank are 'conceivable' considering the level of house prices, he added.

Profits from engineering and construction dropped from pounds 14.8m to pounds 4.5m, although the sale of accommodation vessels accounted for about half the profits last time. Mr Costain said the group was pursuing orders overseas to compensate for the downturn in the UK. Overseas orders were 40 per cent up on last time and now account for pounds 180m of the pounds 725m order book.