Resources and Mining Report - 29/07/11

Resources Corner

Resources and mining companies dominating the headlines this week include BHP's force majeure at its Escondida copper mine, Rio Tinto has been dealt a blow regarding working agreements, Coal & Allied reported a lift in its interim net profit, Origin has approved the first phase of its LNG project in Queensland and a myriad of mining and resources companies have reported mixed quarterly results.

We speak with Drillsearch Managing Director Brad Lingo about the $130 million joint venture with British company, BG Group. We also hear from Westpac Senior Economist Justin Smirk about the week's movements in commodities, and the impact of a possible US debt default.

BHP declares force majeure
BHP Billiton Limited (ASX:BHP) has been forced to declare a force majeure at its majority owned Escondida copper mine in Chile. The move will allow the global miner to temporarily halt its contractual commitments, amid a workers strike that has put operations at the world's largest copper mine at a standstill. The strike, that BHP calls "illegal and unjustified", is reportedly costing the miner $28 million a day. On a positive note, BHP's $US15.1 billion takeover bid for shale gas company Petrohawk Energy was approved by US regulators.

Rio Tinto work agreement ruling
Rio Tinto Limited (ASX:RIO) was dealt a blow this week, with the Federal Court ruling that a non-union collective agreement at a Rio iron ore mine in the Pilbara was invalid. The Australian Financial Review describes the ruling as a "landmark legal victory" for mining unions as it will enable them to bargain on pay and conditions. Rio and BHP are understood to have a collective iron ore workforce of more than 20,000. Rio has told the AFR it is "disappointed" by the ruling and may appeal. BHP says it is seeking legal advice on the relevance of the decision to its operations.

Drillsearch joint venture
Drillsearch Energy Limited (ASX:DLS) has formed a $130 million joint venture with British company, BG Group. The JV is for the exploration and development of unconventional shale and tight gas resources in the Cooper Basin.

Speaking with Finance News Network, Drillsearch Managing Director Brad Lingo explained why the company is so focused on shale gas in the Cooper Basin.

"There are only just now being concerted and valid attempts to demonstrate the commercial viability of producing from Australian shales," said Mr Lingo.

"If you look historically, three of the biggest oil and gas companies in Australia – Santos, Origin and Beach have all grown to be the companies they are coming out of the Cooper Basin ... We've actually got three growth platforms, one being our western flank oil, the other being our wet gas business where it's exploration, development and production and then we have our unconventional business. So we may be geographically focused but we certainly don't have all our eggs in one basket."

"For this year … our focus is to increase reserves, increase production, increase cash flow," Mr Lingo added.

Coal & Allied profit below expectations
Rio's wholly owned subsidiary Coal & Allied Industries Limited (ASX:CNA) has reported a 41 per cent lift in its interim net profit, missing some analysts' expectations for a rise of up to 70 per cent. The company's net profit came in at $227 million in the first half of 2011. Revenue was up 25 per cent in the same period to $1.165 billion, on the back of higher sale volumes and increases in thermal and semi soft coking coal prices. The company says it has experienced a moderate reduction in demand following Japan's natural disasters, but does not expect any ongoing impact to its sales volumes.

Origin's two-train project
Origin Energy Limited (ASX:ORG) and ConocoPhillips have sanctioned a $US14 billion first stage of their LNG project in Queensland. A full two-train project is expected to cost $US20 billion. Origin says it's the largest single LNG sales agreement by annual volume to be signed in Australia. Origin also reported record full year production and sales revenues, up 30 per cent on the year prior.

Quarterly reports, mixed results
Takeover target Macarthur Coal Limited (ASX:MCC) says wet weather hit its June quarter production, resulting in a 22.5 per cent decline in sales from the same time a year before. Whitehaven Coal Limited (ASX:WHC) has side-stepped the impact that weather conditions had on its rivals and recorded a 48 per cent increase in June quarter production, coming in at 1.5 million tonnes. Aquarius Platinum Limited (ASX:AQP) has reported a marginal improvement in fourth quarter output, compared to the year before. Gloucester Coal Limited (ASX:GCL) has reported a 16 per cent rise in fourth quarter sales. Mirabela Nickel Limited (ASX:MBN) has boosted nickel sales by 88 per cent to 3,909 tonnes in the June quarter, compared to the quarter before. Atlas Iron Limited (ASX:AGO) reported a record 1.5 million tonnes of ore to port over the June quarter.

Westpac Senior Economist Justin Smirk says it's been a mixed week for commodities, with US debt default fears weighing heavily on investors.

"Finally the markets are waking up to the fact that this actually may happen. Most of us were being sensible and said that politicians would be sensible in the US and would come to some form of resolution. That's looking increasingly at risk. And that of course is a US dollar negative story."

"So that's been helping commodities at the margin. But there is a fear that this debt crisis, while it may help boost the US dollar, could really upset the US economy and that's actually more of a negative demand story, and the market is a bit schizophrenic switching between the two," said Mr Smirk.

Melissa Beaumont Lee