A rally late this week saw the iron ore price gain per cent, but it came after a week where prices for the steel making commodity dropped to a five year low. With iron ore stocks already tumbling the governments resources forecaster, BREE, has finally pointed towards a major dip in mining investment.
BHP Billiton’s Chairman Jac Nasser offered some insights as he spoke at the company’s AGM. He discussed slowing growth in China and the company’s demerger plans. While he suggested growth in China’s property sector was slowing, while other areas were showing resilience.
NRW Holdings have issued a profit warning to become another victim in the troubled sector. The mining contractor says earnings for full 2015 financial year are likely to be materially lower than the last financial year.
Economic news
Commentators have spent the last six months discussing the collapse of the iron ore price and a general weakening in commodity prices and we here at the resources report have devoted many paragraphs to the commodities vertiginous price chart. But this week, the Bureau of Resources and Energy Economics (BREE) finally got on board as they released their biannual update on resources and energy investment.
“Investment in the Australian resources and energy sector is projected to decline in the medium term as the large LNG projects are completed.” BREE
The report offers no doubt resources investment will slide over the next four years. The iron ore price is just one factor that is culminating in a big drop off in new projects. Aussie LNG projects are adding to growth but US shale gas developments and deals between China and Russia all lead to long term projects being re-assessed.
The report says “total exploration expenditure, including both, minerals and petroleum exploration, decreased 12 per cent to $6.9 billion in 2013-14.”
“In the six months to October 2014 three projects worth $597 million were identified as receiving a positive Final Investment Decision (FID) and progressed to the Committed Stage. This is the lowest number and value of projects moving to the Committed Stage in more than a decade. As at October 2014, there were 44 projects at the Committed Stage with a combined value of $228 billion. LNG projects continue to drive resource and energy investment in Australia and account for around 87 per cent of the value of committed projects.”
“The appetite for risk among project developers and financiers appears to be low in the current operating environment; nevertheless, Australia still has many world class resource deposits that can be developed when market conditions improve.”
Commentary
This week Finance News Network spoke with Pengana Global Resources Fund Portfolio Manager, Tim Schroeders, about iron ore woes and picking winners from a contrarian perspective.
What exposure does the Fund have to iron ore plays?
“We tend to be a bit cautious, but what we’re seeing is an evolution of thinking with regards to iron ore. So the market’s now paying more attention to those companies that have a distinct advantage in quality of product; so higher grade, lesser impurities. But also those companies that can produce that iron ore at a low competitive price, even given the 40 per cent fall year to date in iron ore prices.”
What are some key examples?
“Those companies Rio Tinto, BHP, Vale; some of the pure play domestic iron ore producers continue to be under pressure, because one, the lack of diversification and two, their positioning on the costs curve. So we are very much skewed towards the better, more competitive producers of iron ore and it’s still a great business to be in.”
Forecast
BHP Billiton Limited’s
(ASX:BHP) Chairman Jac Nasser has discussed slowing growth in China and the company’s demerger plans as part of its AGM. Mr Nasser suggested growth in China’s property sector was sowing but other areas were showing resilience.
Rio Tinto Limited
(ASX:RIO) and China’s Sinosteel Corporation are considering a second extension to the Channar Mining iron ore joint venture in Western Australia’s Pilbara region. Both groups have announced their intention to advance talks for the extension following a signing of a Heads of Agreement in Canberra.
Poor result
Shares in NRW Holdings Limited
(ASX:NWH) plunged after issuing a profit warning. The mining contractor says earnings for full 2015 financial year are likely to be materially lower than the last financial year.
Ausdrill Limited
(ASX:ASL) is expecting a hit to revenue after Resolute Mining Limited
(ASX:RSG) deferred mining of the Stage 2 cutback at the Syama sulphide open pit. The mining services provider says its revenues are likely to fall by about $US3.5 million per month over the next eight months, equating to a total of $28 million.
Growth
Shares in Arrium Limited
(ASX:ARI) jumped more than 10 per cent after releasing an upbeat outlook. The mining and materials company expects continued strong demand for grinding media and says total sales volumes are up in the year to date.
BHP Billiton Limited
(ASX:BHP) has cut its anticipated capital spending, and, announced senior executive changes and appointments as it prepares for its demerger. Australia’s largest miner has lowered expected capex to $US14.2 billion in the current financial year and $US13 billion in the following financial year. The company is also targeting to lift its annual savings by $US500 million to $US4 billion by the end of the 2017 financial year.
M&A action
Cockatoo Coal Limited
(ASX:COK) has reached agreement with New Hope’s North Surat Coal Pty Ltd for the sale of its 51 per cent interest in the North Surat Joint Venture. The coal miner says the $25 million sale of its non-core assets is in line with its strategy of focussing on the expansion of its flagship metallurgical coal mine at Baralaba.
Australia’s largest miner BHP Billiton Limited
(ASX:BHP) has ditched plans to sell its Western Australian Nickel West business. The global diversified miner has been undertaking a review of the business since May but says the preferred option to sell it could not be achieved on an acceptable basis. BHP plans to keep Nickel West in its portfolio as a non-core asset and continue to operate the business to realise its full value.
