Downer EDI to snap up 400 Macmahon workers for Xmas Creek iron ore contract

Downer EDI plans to employ about 400 workers from rival Macmahon Holdings when the contractor starts an expanded mining services contract at Fortescue Metals Group's Christmas Creek iron ore mine in April.

Downer has about 600 workers providing mining services at one of Fortescue's two Christmas Creek iron ore-processing facilities in the Pilbara, while Macmahon has had about 700 workers at the second facility.

To cut costs, Fortescue has combined the two contracts, announcing in February that Downer had been appointed to provide drilling, blasting and haulage services at both facilities from April in a new $720 million contract.

Macmahon's contract with Fortescue, which had generated $260 million in annual revenue for the Perth-based company, will end on April 20, forcing the company to cut costs and consolidate offices.

Downer will take on about 150 Macmahon employees when the contract starts in April, and then take on another 250 a month later after training the first intake.

Fortescue's decision to award the contract to Downer has erased investors' fears that the iron ore miner would bring its contracting operations in-house to save cash. Iron ore prices have halved over the past 12 months to trade at less than $US60 a tonne.

The expanded contract is expected to generate lower profit margins for Downer than its previous Christmas Creek contract, partially because it will be using Fortescue's equipment at the second iron ore processing facility rather than its own equipment.

But Downer's mining division is still expected to generate annual profit margins of between 7 and 8 percent.

Analysts at Macquarie Securities said that if Downer did a good job for Fortescue, its contract could be extended beyond the current expiry date of September 2016. The contract includes an option for a year's extension.

Macquarie expects the expanded contract to generate between $5 million and $8 million of net profit after tax for Downer in fiscal 2016.

Downer's shares closed at $4.34 on Tuesday, down 8 per cent in the year to date compared to a 7.7 per cent rise in the S&P/ASX 200.