Earnings forecasts and slowing iron ore demand

Resources Corner

A slowdown in mergers and acquisitions activity has dominated resources news this week with claims transactions in the mining sector so far this year having dipped to the lowest level in a decade.
 
The results come as the iron ore price slips to a new 5 year low. The dip has this week been pushed by Chinese steel mills cutting production in a bid to clear the skies of Beijing for visiting foreign dignitaries, arriving for the APEC meeting.
 
With a swathe of annual general meetings we’ve seen a range of outlook and forecast reports. BHP Billiton has affirmed its annual production target after boosting its quarterly output, Drillsearch Energy has indicated that it’s on track to meet its forward guidance production figures. While BC Iron has lowered its FY2015 guidance forecast on the back of lower shipments in the September quarter and sliding iron ore prices.
 
Commentary
 
This week AMP Capital Investor’s Head of Investment Strategy, and Chief Economist, Dr Shane Oliver, offered his views on the iron ore price and what it means for the big players.
 
The iron ore price has plunged this year: What’s your forecast for the price by year end? 
 
My feeling is that the iron ore price will probably end the year a little bit higher than it is at the moment maybe around $90 a tonne. I must say picking iron ore price targets is a bit like throwing darts at a dart board, a bit like trying to get the Aussie dollar right. But at the end of the day it has fallen pretty hard so far this year from $134 a tonne recently falling below $80 a tonne. My feeling is that as the year comes to an end it’ll stabilise and we’ll see a bit of an uplift. The broad picture for iron ore has become more difficult, with a massive increase in supply, slower growth in China than we’ve been used to, that points, I think to a long term down trend not to the $20 or $30 we had ten years back but I think the price over time will gradually soften. 
 
Do you think this softening price will make players like BHP and Rio even bigger?
 
I guess the reality here is that a lower price will actually benefit, big time, the big companies because they’ve got an extremely low average and marginal cost of production, I think the average cost for BHP or Rio would be around $30 tonne so it’s all pure profit when we’re up here at $80 or $90 tonne they’re doing very well. Not as well as they used to but they’re doing pretty well. And so the key for them is to squeeze out the smaller the less efficient players once they’ve done that they will control the market even more than they have in the past and therefore they’ll get more control over the price. So short term you can argue well they might prefer a higher price but at the end of the day they’re probably secretly smiling because longer term this is going to benefit them. 
 
Fair-weather forecasts
 
AngloGold Ashanti Limited (ASX:AGG) has beaten its cost and production guidance in the third quarter of the financial year. The gold producer increased output by 8 per cent from the year before to 1.1 million ounces. AngloGold Ashanti says fundamental operating and safety improvements continue to gain traction across the business.
 
Australia’s biggest company BHP Billiton Limited (ASX:BHP) has affirmed its annual production target after boosting its quarterly output. The global diversified miner increased overall group production by 9 per cent in the first quarter and posted records for eight operations and four commodities. Iron ore production rose 17 per cent to a record 57.09 million tonnes, ahead of analyst expectations for 56.5 million tonnes. CEO Andrew Mackenzie has described the performance as robust and advises the company’s relentless focus on productivity continues to yield strong results. BHP Billiton has confirmed it expects to increase iron ore production by 11 per cent to 225 million tonnes over the current 2015 financial year.
 
Atlas Iron Limited (ASX:AGO) says its cost improvement programme has reduced capital expenditure for the 2015 financial year by $31 million. All in cash costs dipped to $68.90 per tonne in the September quarter, down from $75 per tonne in the June quarter. Savings over the year are now expected in the range of $65 - $90 million per year, up from $50 million to $80 million. Forecast capital expenditure is now $94 million, down from $125 million. 
 
Gold producer Silver Lake Resources Limited (ASX:SLR) says it’s on track for full year production guidance and highlighted strong sales in the September quarter. Gold sales for the three months totalled 31,469 oz at an average price of $1,472 oz for revenue of $46.3 million. Production has commenced at Wombola Dam with close to 20,00 tonnes of ore mined already. 
 
Rio Tinto Limited (ASX:RIO) says a tender of its rare diamonds has achieved the highest average price per carat since the tender began in 1984. The miner’s 30th anniversary collection of 54 rare pink and red diamonds from its Argyle diamond mine also attracted a record amount of bids.
 
Drillsearch Energy Limited (ASX:DLS) has indicated that it’s on track to meet its forward guidance production figures. The oil and gas producer concedes its oil and gas production slipped slightly in the first quarter on the back of weakening oil prices.
 
Structure
 
Rio Tinto Limited (ASX:RIO) has extended the tenure of CEO Sam Walsh and CFO Chris Lynch. Chairman Jan du Plessis says given the performance of Mr Walsh the decision was an easy one for the board.
 
New ventures
 
Shares in Lincoln Minerals Limited (ASX:LML) soared after advising it expects to lodge a mining lease application for Australia’s newest graphite mine in the current quarter. The graphite developer says the global demand market is increasingly favouring new mine start-ups and market sentiment towards graphite has “warmed up and held” over this year.
 
Grey skies
 
Shares in Aditya Birla Minerals Limited (ASX:ABY) have slumped after announcing significant impairment charges. The company has flagged charges of between $175 million to $225 million for the six months to the end of September. Aditya Birla expects to release its financial results at the end of this month. Shares in Aditya Birla Minerals have slumped 12.5 per cent to $0.21 at noon.
 
BC Iron Limited (ASX:BCI) has lowered its FY2015 guidance forecast on the back of lower shipments in the September quarter and sliding iron ore prices. The iron ore producer said production slowed in the first quarter as new screening initiatives to deal with areas of high clay content were introduced resulting in missed shipments. 
 
Shares in Newcrest Mining Limited (ASX:NCM) have dropped as Australia’s largest listed gold miner holds its annual general meeting. Chairman Peter Hay described the 2014 financial year as one of both change and progress following a disappointing fiscal 2013. Newcrest booked a $2.2 billion loss in fiscal 2014 but Mr Hay said change occurred over the year through board and senior management renewal.