With a focus on iron ore this week there is a growing divide between the major players, who are driving up export volumes but who can weather the lower prices of a supply glut, as compared to the smaller players who are struggling. We are seeing the beginnings of some consolidation activity.
Rio Tinto Limited has reported a net profit of $US4.4 billion in the first half of this year while Mineral Resources has lifted its full year net profit by 28 per cent to $231 million and as the iron ore price slide drives consolidation we see BC Iron poised to strengthen its Pilbara iron ore portfolio through the acquisition of Iron Ore Holdings.
Commsec economist Savanth Sebastian suggests the iron ore price will continue to ease with a stable price around $US80; the key is Chinese growth.
Economic News
Once again it’s the iron price that is driving debate in the resources sector this week. The price of the steel making commodity hit a two month low as the strength of the Chinese economy comes into question.
Commentators vary on their views of where the price will go; Goldman Sachs is notably bearish suggesting an average price of $US80/tonne coming into 2015. Weaker prices will likely flow from a growing supply glut.
Commentary
This week FNN spoke with Commsec economist Savanth Sebastian to get his take on the transitioning resources sector.
What’s your outlook for the sector over the coming months?
It’s very tough for junior explorers or junior miners in this environment. The mining investment boom as we all know is done and dusted, it’s really a production story, so if you add production now you’ve got a low cost of capital and a low cost of production well then you are going to be making some serious cash and I think that’s where the big miners are really going to benefit.
Which of the big miners will fare the best?
“I think our favourite would have to be Rio Tinto, despite expectations of a fall in the iron ore price, production continues to be ramped up, you look at copper and iron ore production and it actually looks very, very solid. So I think Rio, even for the likes of BHP, it’s all about a production improvement but it comes down to how much you get out of the ground and get it across to Asia. So we are comfortable about resources but you have to pick and choose amongst the sector.”
You mentioned the price of iron ore, it has fallen this year. Do you believe this is the ‘new normal’ or what would we need to see for a lift to occur?
“I don’t see a huge lift in iron ore prices, it’s actually likely to ease from here, even a little bit more as more supply comes on board, especially the large global players start bringing a lot more supply on board it’s very likely the iron ore price will ease. You’ve got to look at the Chinese growth story and if you expect China to grow significantly from here well then it’s very likely that you’d see an improvement in iron ore prices but that’s not our central forecast, I think China is comfortable growing at 7.5 – 8 per cent, it’s more about fixing other issues they have around corruption, social inequality and the environment and this new Chinese government is willing to take a slower growth rate to achieve those outcomes and I think that means commodity prices are likely to remain relatively subdued over the next 12 months.”
Earnings results
Rio Tinto Limited
(ASX:RIO) has reported a net profit attributable to owners of $US4.4 billion in the first half of this year. The diversified miner has beaten analysts expectations to post the strong first half result after shipping record iron ore volumes and cutting costs. CEO Sam Walsh says they have increased underlying earnings by 21 per cent to $US5.1 billion and enhanced operating cash flow by eight per cent.
Mineral Resources Limited
(ASX:MIN) has lifted its full year net profit by 28 per cent to $231 million, coming in within guidance from April. The diversified mining services company attributes the gains to higher iron ore volumes helping to counter lower ore prices.
OZ Minerals Limited
(ASX:OZL) has trimmed its interim loss and forecast higher production over the coming years. The copper and gold producer reported a first half net loss of $7.4 million, from a loss of $268 million the year before. Revenue rose 11 per cent to $351 million on the back of higher gold sales volumes and higher Australian dollar copper and gold prices.
Bougainville Copper Limited
(ASX:BOC) has reported a net loss of $2.3 million in the first six months of 2014. In the same period last year the copper, silver and gold miner reported a net profit of $0.5 million.
Productivity and growth
BC Iron Limited
(ASX:BCI) is poised to strengthen its Pilbara iron ore portfolio through the acquisition of Iron Ore Holdings Limited
(ASX:IOH). Both companies have agreed to enter a bid implementation agreement under which BC Iron will offer to acquire Iron Ore Holdings through an off-market takeover.
Fortescue Metals Group Limited
(ASX:FMG) chief has outlined plans to halve its energy costs as part of its continued to focus on efficiency and productivity. CEO Nev Power says the Pilbara focussed iron ore miner could save $US400 million by moving from diesel to gas.
Set-backs
Shares in Gindalbie Metals Limited
(ASX:GBG) slumped after the iron ore miner revealed a $640 million write-down of its interest in the Karara project. The impairment charge recognises lower than forecast production levels at the project due to current capacity restrictions. Gindalbie Metals also advises the write-down acknowledges a lower than forecast iron ore price and a higher than expected Australian dollar exchange rate.
Shares in Ausdrill Limited
(ASX:ASL) have resumed trading after being placed in a halt. The mining services group has announced goodwill write downs of between $60 million and $90 million. This comes following a ‘review of the company’s longer term forecast on the back of the recent fall in the iron ore price and continued challenging market conditions’.
