Western Australian mining and mining service industries have experienced a huge rise in the demand for skills and equipment which, along with higher fuel costs, has driven up their costs of doing business.
Western Australian mining and mining service industries have experienced a huge rise in the demand for skills and equipment which, along with higher fuel costs, has driven up their costs of doing business.
Net benefits from higher metal prices are often illusory, with much of the industry making heavy going against this tide of rising costs. Additional costs associated with failure of the Varanus Island gas plant have compounded these problems and could be the straw that broke the camel's back for some.
In the light of recent corporate failures among several gold miners, including Monarch Gold Mining and View Resources, along with the spectre of high-cost nickel miners closing operations, mining companies operating in WA's eastern Goldfields region must be wondering what has happened to the much reported 'resources boom' and who is actually getting any benefit.
Close examination of the mining industry shows that the so-called boom is now largely confined to the bulk commodities of iron ore, coal and liquefied natural gas.
Prices for all three commodities have more than tripled over the past three years as Chinese hunger for steel making raw materials and energy lifts global demand. Australian iron ore producers have scrambled to lift output in the Pilbara and Mid West regions of the state, which has put increasing pressure on available physical resources, pushing up costs for all companies.
This is WA's own version of what is known as the Dutch disease, where massive investment in one small sector of our economy actually damages the broader economy by pushing up costs for all other industries, while their revenue remains under pressure.
In late 2005, the Australian dollar gold price lifted out of a long standing trading range of $A520 to $A580 per ounce and rose to more than $1000/oz but has since settled at around $A960/oz.
Meanwhile, average operating costs have also skyrocketed, from about $A400/oz to more than $A600/oz, while the capital cost for new plant has risen by 60 per cent to 100 per cent.
Despite this lift in the gold price, new players in the gold game have been few and far between, with only Avoca Resources making an impressive start, while others have faltered and fallen in the face of poor planning and rising costs.
In the light of these corporate failures and concern about ongoing costs, planners and investors remain shy of the gold mining sector where, outside of the Anglo/Independence Group's Tropicana deposit, significant new discovery has been elusive.
All base metals experienced strong price appreciation in the early part of this decade, rising four- and five-fold. Copper lifted from around US80 cents per pound in mid 2003 to more than $US4/lb in mid 2007, while nickel rose from $US8,000 per tonne to more than $US50,000 per tonne in mid 2007.
Meanwhile, the copper price remains around $US3.50/lb and has yet to significantly retreat, but prices for nickel and zinc are well off their peaks, leading to several mine closures and a hiatus in development and exploration.
Among the miners who took advantage of Western Mining's capitulation from the nickel mining industry at the nadir of the last cycle in 2003, companies such as Mincor and Independence Group have undergone a wild ride.
Mincor lifted from about 80 cents per share in early 2006, hitting more than $5 in late 2007, but now languishes at just over $2 per share.
Over the same period, Independence lifted from around $1.50 to trade over $9 per share, but now sits at around $3.30 per share.
Industrialisation and urbanisation in Asia, especially China, keeps the 'stronger for longer' commodities outlook intact, but we have probably reached a pause point in a 10- to 20-year upward cycle.
Predicted slowing of global industrial production during 2009 is most likely to result in lower prices for industrial commodities over the coming two years.
Medium-term weakness in capital markets will further reduce the industry's ability to raise new equity, unless a very good growth story can be told. Many smaller companies are now facing extinction while those with cash may be able to hang on for the next boom.
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Briefcase previously speculated that, since the financial stocks had already taken such a battering and had fallen into serious value territory, a catalyst which might take the All Ords Index back to 4,700 points would most likely be a down leg in resources.
Last week, we saw the ASX 200 Index hit 4,800, while the All Ords found support at 4,900. As expected, the weakest stocks were on the resources side of the market.
On the downside, BHP was the biggest loser last week, falling 370 cents or 9.2 per cent to $36.65, followed by Woodside, down 510 cents or 8.4 per cent to $55.50 with RIO third worst, shedding 1,050 cents or 8.3 per cent to $115.50.
Fortescue was also hit, falling 38 per cent from over $13 on June 26 to trade at just over $8 per share at its low last week. After a small bounce, this trend is continuing with an initial target of $32/share for BHP, while Rio appears destined for a fall well below $100/share, with $80/share in the picture.
Further market weakness cannot be ruled out. The US financial system appears to be broken.
Lack of regulation has let the foxes loose in the chicken shed while the farmer appears to have straw for brains. Briefcase believes the resulting housing finance carnage and impending carnage on auto finance markets, has not yet seen its worst days.
A weakening outlook for industrial production, moving into 2009 is likely to take some additional heat out of commodity prices as industrial materials weaken.
Bulk commodities, which have enjoyed huge price increases over the past three years, would do well to see a rollover of current prices in 2009, but some pullback for coal and iron ore may be on the cards, which would flow on to the share price of all concerned.
Closure of high cost base metals mines has commenced as the industry adjusts to weaker prices for nickel and zinc.
Companies will be adjusting mining schedules and capital spending while lowering costs by high grading their operations so as to conserve capital by reducing non-essential spending in areas such as business development and exploration spending.
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- Peter Strachan is the author of subscription-based analyst brief StockAnalysis, further information can be found at Stockanalysis.com.au
