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Australian miners suffer amid capital squeeze
THE AUSTRALIAN JULY 15, 2015 12:00AM
Paul Garvey
Resources Reporter
Perth
Capital raisings through the years Source: TheAustralian
The 2015 financial year was among the worst in recent memory for Australian mining and exploration companies trying to raise money, highlighting the challenges facing Australian miners hoping to use equity markets to repair balance sheets squeezed by falling commodity prices.
Data from Bloomberg showed Australian-listed miners and explorers had raised $5.6 billion in fresh equity last year through 354 raisings and placements, well up from the $2.75bn raised in 2014 and suggesting a rally in financing conditions for the sector.
But the figure fell to $2.9bn when the $2.7bn bailout of Yancoal Australia by its Chinese parent was excluded, putting 2015 on par with 2014 when equity raisings fell to their lowest level in almost a decade.
EY global mining and metals leader Mike Elliott told The Australian that raising fresh capital was still “very, very tough” for junior explorers or companies working in commodities that had suffered sharp falls in value.
“If you’re in iron ore or you’re in coal, and you’re talking about quite a lot of Australian companies there, you will still find it difficult to raise capital because the market is looking at what has happened in the last few months and sees that as a predictor of what will happen again in the future,” Mr Elliott said. “There just isn’t a great appetite there.”
The challenging two years for Australian miners and explorers compare with the heyday of 2008 and 2009, when the sector raised more than $22bn of fresh equity as investors scrambled for exposure to the mining boom.
The latest figures underscore the tough environment facing Atlas Iron as it tries to revive its fortunes through a raising of up to $180 million.
Atlas on Monday announced it would extend the closing date for the retail component of its equity raising until tomorrow. As of last Friday the company had received $26m in applications as well as $41m of commitments from various suppliers and contractors. The miner plans to pay down some of its $340m in debt as part of its broader plans to restructure its operations and return to profitability.
The capital squeeze is being keenly felt by the hundreds of small “junior” companies which, in the absence of cash flow from any operations, rely on equity injections to finance their exploration efforts.
Advisory firm BDO recently estimated that one in five Australian juniors are so-called “zombie companies” that have stopped exploration as they struggle to stay afloat.
EIM Capital fund manager John Robertson told The Australian that while some juniors were finding fresh equity investment, they were often being compelled to offer very generous terms to new investors.
“The investors who do have capital know they are in a strong bargaining position,” Mr Robertson said. “The deals being struck are being done on some pretty expensive terms, but the alternative (for the resources companies) is to have nothing.”
The companies that have been able to get significant equity raisings away have generally done so off the back of meaningful discoveries.
Sirius Resources was able to regularly tap investors for fresh equity off the back of its Nova-Bollinger nickel-copper discovery, while Gold Road Resources earlier this year raised $39m from institutional investors to continue work at its big Gruyere gold discovery in Western Australia.
Gold Road managing director Ian Murray said the industry must work harder to convince investors of the merits of continued investment in the sector. “Gold Road due to this discovery has got a good audience, but overall the resources sector is still very, very tough and I can’t see it improving in the short term.”
He said the industry should focus on improving margins and giving yield to investors to help lure them back. “It doesn’t help to attract investors if all you are saying is ‘invest in us because the gold price is going up’. Investors need to invest in you because today you can give them a return, and tomorrow you can give them an even better return.”
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http://www.smh.com.au/business/markets/c...iio85.html
Commodities to hit rock-bottom in 2015 before 'modest recovery', says World Bank
Date
July 23, 2015 - 5:19PM
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Stephen Cauchi
Stephen Cauchi
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The World Bank expects iron ore – by far Australia's largest mineral export – to average $US55 per tonne over 2015 before lifting to $US56.70 in 2016.
The World Bank expects iron ore – by far Australia's largest mineral export – to average $US55 per tonne over 2015 before lifting to $US56.70 in 2016. Photo: Reuters
Commodity prices – including major Australian exports like iron ore and coal – are expected to hit rock-bottom in the second half of 2015 before picking up in 2016, according to the World Bank's third-quarter commodity markets outlook.
A major exception is gold, which the bank has forecast will still be trading below current prices in 2025.
"Most commodity prices declined in the second quarter of 2015 due to ample supplies and weak demand, especially in industrial commodities," said the World Bank report. "These trends are expected to persist for the rest of the year, with a modest recovery in 2016."
Iron ore, by far Australia's largest mineral export and now trading at $US51.76 per tonne, is expected to average a price of $US55 per tonne over 2015, said the report. This is 46 per cent below the levels it was trading at in 2014.
The bank predicted that the average price of iron ore would lift slightly in 2016 to $US56.70.
Thermal coal, Australia's third-biggest mineral export now trading at $US60.45 per tonne, was expected to average $US58 per tonne in 2015, said the report. It would lift slightly to $59.50 per tonne in 2016.
Crude oil, currently trading at $US56.11 a barrel, would follow a similar trajectory, said the World Bank. It would average $US57.50 in 2015 before lifting to $US61.20 in 2016.
Shine off gold
Other top-10 Australian mineral exports, including aluminium, copper, lead, nickel, and zinc, were forecast to follow a similar price trajectory.
The exception was gold, currently trading at $US1098 an ounce. The World Bank forecast prices to decline every year, reaching just $US1000 per ounce in 2025. "Gold prices are expected to fall 12 per cent, largely driven by expectation of a rising dollar and tightening in US monetary policy."
The World Bank's forecasts are largely in line with others, including recent forecasts produced by Citi and RBC Capital.
However, there are exceptions. Goldman Sachs, for example, has slashed its forecast for copper at the end of 2016 to $US5361. This compares with an average analyst outlook of $US6608, according to 26 estimates compiled by Bloomberg.
Morgan Stanley, meanwhile, said on Thursday that in a worst-case scenario, gold could sink to $US800 an ounce.
UBS commodities analyst Jo Battershill said the commodities forecasts from UBS and the World Bank were broadly similar.
"You could make the same argument they've made from our price deck," Mr Battershill said.
"We don't have massive bounces from our current forecasts, but our current forecasts are above current pricing."
But Mr Battershill said no analyst could be certain that 2015 would be the year in which commodities prices reach their nadir. "Never say never."
He cited the Goldman Sachs report about copper as an example of potentially further downside for commodities.
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Mining services mega merger in the pipeline
THE AUSTRALIAN JULY 29, 2015 12:00AM
Bridget Carter
Mergers & Acquisitions Editor
Sydney
Gretchen Friemann
Mergers & Acquisitions Editor
Sydney
Mining services companies at the centre of aggregation plan Source: TheAustralian
A mega merger between mining services companies worth a collective $5 billion could be afoot, with suggestions that private equity firms are working on a major aggregation plan for the dominant industry players, which are all being hit by the resources sector downturn.
It is understood that private equity firms Pacific Equity Partners, Champ and Kohlberg Kravis Roberts, which already owns the challenged mining services provider Bis Industries, are among those examining the possibilities for bringing businesses together in the same sector.
Companies said to be under scrutiny as part of such are move are Bradken, Magotteaux, Esco, MeElecmetal, CQMS Razer and Arrium’s Moly Cop. Austin Engineering could also be in the mix.
Collectively, the companies are worth more than $5bn, but sources say that more realistically a deal worth about $3bn could be in the fold over time.
Already, Bradken looks set to be acquired by Magotteaux, a subsidiary of Chile’s Sigdo Koppers, as part of a recapitalisation deal a month ago involving Champ Private equity.
As part of the arrangement, Champ and Sigdo Koppers agreed to inject $70m into the business on the basis that the Sigdo Koppers subsidiary, Magotteaux, had the option of buying Bradken within 60 days.
Interestingly, UBS advised Sigdo Koppers on its deal with Bradken and is also one of the banks working with Arrium on its divestment of Moly Cop.
One suggestion is that the advisory firm could be looking at ways to bring the companies together, potentially on behalf of another private equity firm such as PEP, although others believe such a play would be doubtful, with Magotteaux unlikely to be able to own Moly Cop due to anti-trust concerns, but its bidding partner Champ could potentially be a buyer.
The sales process for Moly Cop is said to be imminent, with PEP in conjunction with Koch Industries, KKR and Carlyle all said to be circling. US-based Esco also is believed to have made advances for Bradken in the recent past, while Bradken itself has previously made advances for its Quadrant-owned rival CQMS Razer.
Mining services companies are facing overwhelming challenges remaining profitable as the resources downturn continues to bite, and consolidation has widely been mooted as the only option if they are to survive.
All have struggled in various countries, but the logic behind such a strategic amalgamation move is that all groups have regions where they perform strongly, and they manufacture equipment used for mining that is considered complementary.
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OPINION Aug 3 2015 at 9:27 AM Updated 34 mins ago
BHP Billiton, Rio Tinto avoid bargain-hunting amid low commodity prices, yield obsession
The message about straw hats in summertime doesn't appear to be sinking in at the big end of the mining sector.
by James Thomson
At a time when every investor with a online broking account can quote the folksy wisdom of Warren Buffett, you'd think that a line like "be greedy when others are fearful" might be ringing in the ears of a few miners and investors as they head to the mining sector's annual conference/catch-up, Diggers & Dealers.
Certainly it's fitting that the conference is being held, as always, in the West Australian mining town of Kalgoorlie, because the gold sector is where the action is.
As our reporter on the ground this week, Tess Ingram, writes, that's where the deal making action is right now.
Last week we saw a slew of deals in the gold sector, including OceanaGold lobbing a $C856 million ($893 million) takeover offer for Toronto-listed Romarco Minerals on Thursday.
And it looks like gold and to a lesser extent zinc are set to dominate the deal making at Diggers this week, as the smaller end of the sector starts to cautiously look for growth opportunities – and good bargains.
But the message about straw hats in summertime doesn't appear to be sinking in at the big end of the mining sector.
The declaration from respected Deutsche Bank economist Paul Young that BHP Billiton is "ex-growth" for the next few years – as measured by the company's own preferred standard, known as copper equivalent – is surprising.
As Young himself says: "The world's biggest mining company, with very low risk assets, in low risk jurisdictions, should not be in a position where they are ex-growth - the value opportunity for BHP has always been that they can grow while everyone else is not."
BARGAIN OPPORTUNITIES
Leaving aside BHP's position for the moment, the broader question is why aren't any of the big miners of the world out there hunting for bargain opportunities, and trying to growth when others are not?
Part of the reason is strategy. BHP for example, has a clear "shrinking to greatness" strategy under chief executive Andrew Mackenzie, so the company has narrower range of targets than 12 months ago when it owned all the assets now housed in South21.
Part of the reason is timing related. As veteran resources banker said last week, many miners probably need commodity prices to get much lower to force some real fire sales, or a bit higher, to give everyone confidence things have bottomed and are on the way back up.
But part of it is surely a caution born of the global obsession with yield. As Young asks when he suggests BHP might need to do a big deal to restore growth - do they really have a licence to do such a thing?
Would the investors who have bought into a big global miner because they promise to maintain or growth its dividend really reward management who make a bold, counter cyclical deal?
Probably not. Which is why the mining sector may well repeat the mistakes of the past, which have seen them write down the value of acquisitions they made since the GFC – during the commodities super cycle, or the top of the market – by 90 per cent, or $US85 billion.
Straw hats in winter, anyone?
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Diggers & Dealers 2015 showed a mining industry in search of optimism
Date
August 7, 2015
Tess Ingram
About 1700 people descended on Kalgoorlie, Western Australia for Diggers & Dealer's 23rd year, and while investment bankers were still shouting bottles of Moet, the news flow and mood was definitely depressed, writes Tess Ingram
About 1700 people descended on Kalgoorlie for Diggers & Dealers 23rd year,a far cry from the 2400 attendees in 2011. Photo: Ryan Stuart
You can't blame Metals X boss Peter Cook for trying to lift the the mood at this year's annual Diggers and Dealers mining forum.
"There is all this pessimism," the colourful veteran mining executive told the conference. "Where are we going in this industry? Everyone is pessimistic, it's not that bad! This is the best industry in the world."
If you were going to be out deal-hunting, now is the time.
Diggers & Dealers delegate
Maybe, but it is also an industry under intense pressure and the mood at the forum was decidedly flat. Since last year's Diggers, base metals are down between 20 per cent and 40 per cent, gold is about 15 per cent lower and iron ore plummeted nearly 50 per cent during the year.
One senior mining executive said he hadn't seen conditions "this bad" across the board in his more than 20 years in the industry. That was reflected in sentiment and news flow at the three-day event.
About 1700 people descended on Kalgoorlie, Western Australia for the forum's 23rd year, a substantial figure during a downturn but a far cry from the record 2400 attendees set in 2011.
The chairman of gold producer Evolution Mining, Jake Klein, said there was no denying "sentiment is poor".
"Certainly the nickel producers, iron ore producers are all wearing some pain," he said. "With gold producers I think there is a range; if you are a junior that needs funding you are in trouble.
"We would like to say Evolution is in a good space and making money and presents an opportunity but sentiment in the sector is lousy. And when you look at the numbers it's appropriate. The dollar falling is helping a lot and costs have come down but sentiment is poor."
Several fund managers featured among the delegates as well as representatives from the investment banking community, including Macquarie, Royal Bank of Canada and Credit Suisse.
Likely lured by the prospects of deals in the gold space, investors may have been disappointed.
It was widely noted Diggers produced less news flow than in past years. A few little raisings and a couple of smaller assets revealed to be for sale was about as sexy as it got.
However, a number of delegates suggested this year's forum attracted some investors attending the event for the first time, many from overseas, in the hope of finding some value in the downturn.
"If you were going to be out deal-hunting, now is the time," one delegate said. "You'd come and suss out what's going on and sort the wheat out from the chaff."
One bright spot was the gold sector, especially its larger constituents, which have embarked on a string of deals after the lower Australian dollar buoyed them from declines in the US dollar gold price.
Most gold players at the conference, including Northern Star Resources, Evolution Mining, Metals X, OceanaGold Corporation and Regis Resources, said they are open to or actively chasing deals.
As new project development dwindles, product spend shrinks and pricing pressure intensifies, the mining services and suppliers sector has been one of the worst-hit sectors and is bracing for more pain.
There seemed to be slightly more representatives from the battered sector fronting booths in the forum marquee than in recent years, including WesTrac, Emeco and BGC Contracting.
Networking advantage
Energy Power Systems WA regional manager Tony Warthold said he was reluctant to attend the conference this year because of the flagging sentiment in the sector and while he acknowledged it wasn't an event that resulted in immediate sales, it was good for networking.
"It is a networking event and a place to be seen," Mr Warthold said. "It's great for that and to get a feel for what is in the wind, what's coming up."
Energy Power sells and hires power systems and offers design and engineering services for new projects.
Mr Warthold said the competing sales and hire businesses thrived at different points in the cycle providing a buffer for the company but tendering for project work was becoming more challenging.
"Everyone is interested in everything that is out there at the moment so it is very aggressive in trying to get any sort of opportunity," Mr Warthold said.
"As it dries up, the level of interest from the large players in the smaller scale stuff they normally wouldn't touch is up."
One thing that certainly didn't dry up was the alcohol. The Diggers team had quite an impressive shopping list for the conference's myriad functions. Its organisers placed a hefty order for 200 bottles of Moet Vintage champagne, 1400 bottles of red and white wine, 260 cartons of beer and 24 bottles of port.
The final gala awards dinner sold all 1100 seats and the historic gold mining town's pubs hosted delegates until the early hours of the morning.
Brokers, banks and law firms, including Rothschild, Argonaut, Macquarie, Hartleys, PwC, Ernst & Young and Deloitte, put their cards behind the bar at a number of events.
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Aug 18 2015 at 4:51 PM Updated Aug 18 2015 at 5:41 PM
Coal is cheaper than water and cabbage pricier than steel
As the coal price touched another record low in China on Tuesday, the outlook for Australia's other major export, iron ore, also worsened. Reuters
by Angus Grigg
First cabbage was more expensive than steel, now the price of coal in China has fallen so dramatically it is far cheaper than water.
As both coking and thermal coal prices hit new record lows in China on Tuesday, the outlook for Australia's other major export, iron ore, has also worsened.
The China Iron and Steel Association (CISA) said further cuts in steel production should be expected over the next six weeks, as steel consumption fell at an annual rate of 5.2 per cent in July, its worst result on record.
"That is far worse than even the most bearish analysts had expected," said Tim Murray, the managing director of the Beijing-based, J Capital Research.
In a typical economic cycle the opposite should be happening, as China's housing market is showing strong signs of recovery. It is the key driver of steel demand, accounting for around one quarter of consumption.
But gains in home prices are not translating into greater demand for steel, even as the iron ore price has risen marginally in recent weeks after lower than expected supply from Australia and Brazil.
For the first time in 16 months new home prices across China are rising in more cities than they are falling, according to government data released on Tuesday.
The National Bureau of Statistics said prices rose in 31 of the 70 cities surveyed, compared to declines in 29 cities – prices were flat in the remainder.
This is the third month of rising home prices across China and implies a gain of 0.3 per cent since the last survey in June, according to data compiled by Reuters.
Yet there is little good news on the horizon for either coal or iron ore.
CISA, the country's peak body for iron ore and steel, released a horror report which showed not only a greater than expected decline in consumption, but that production had fallen by 4.6 per cent in July compared to the previous month.
Analysts had been expecting a fall of around 2 per cent.
Average daily production was even worse, falling 7.6 per cent in July, compared to June.
"This is the beginning of the big slow-down in [steel] production," said Mr Murray from J Capital.
He said the drop in production came despite steel exports rising 9 per cent over the month and 21 per cent on an annual basis.
"This shows how bad domestic [steel] demand really is," he said.
CISA said it expected production to decline over the next six weeks, partly due to restrictions on heavy industry ahead of a victory parade in Beijing to mark the 70th anniversary of the ending of World War II.
Beijing has imposed strict air quality standards on neighbouring provinces to ensure blue sky during the event in early September, which will see world leaders including Vladimir Putin in attendance.
CISA is expecting a slight pick-up in demand later in the year as the central government increases infrastructure spending in an effort to meet its annual growth target of 7 per cent.
Even still, Goldman Sachs are forecasting the iron ore price to average $US49 a tonne this quarter, 13 per cent lower than its current level. The investment bank expects a price of $US44 a tonne in 2016.
The outlook for coal is equally weak after the National Energy Administration said on August 14, that China's power consumption increased just 0.8 per cent over the first seven months of the year. This is sharp decrease from the 4.9 per cent gain during the same time last year.
Despite more focus on renewable energy and natural gas, China still generates around 80 per cent of its electricity from coal.
"The economy is not good and so it's hard to see how the price will increase," said Lin Xiaotao, an analyst with ICIS Consulting. "There is also too much supply."
This saw coal imports slump 38 per cent over the first half of the year. Ms Lin said China's imports are likely to contract further, after the central bank devalued the yuan last week, making domestic supplies more attractive.
Prices hit a record low on Tuesday, dropping to 411 yuan a tonne on the benchmark Bohai Bay Coal Index. Prices are 52 per cent below their peak in November 2011.
Coking coal, used in steel making, is also at a record low, trading at 680 yuan a tonne.
On an equivalent basis this means coking coal is cheaper than water, which is price around 1000 yuan a tonne (1,000 litres).
In early 2013 a tonne of coking coal and the equivalent amount of water were similarly prices, before the end of the resources boom saw coking coal prices halve.
In July research house Platts caused a sensation by noting a tonne of hot rolled steel was worth less than the equivalent amount of white cabbage and had been for some time.
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Copper price tumbles to six-year low
ESE ERHERIENE, TATYANA SHUMSKY DOW JONES AUGUST 19, 2015 8:14AM
Copper prices tumbled to fresh six-year lows overnight on signs of weakness in China’s economy.
The most actively traded contract, for September delivery, fell US3.4c, or 1.5 per cent, to settle at $US2.2870 a pound on the Comex division of the New York Mercantile Exchange. This was the lowest settlement since July 2009.
The London Metal Exchange’s three-month copper contract fell 2.6 per cent to $US5035 a tonne, after tumbling below the psychologically important $US5000 level in afternoon trading to hit a six-year low of $US4983 a tonne.
Copper’s decline comes as all industrial metals continue to retrench from the boomtime peaks of 2011. As with other base metals, copper has suffered from concerns about a global supply surplus and fears about future demand from China, which consumes around 45 per cent of the metal. While many analysts say faltering Chinese demand will continue to lead copper lower, others predict prices will rise by the fourth quarter because Chinese buying will actually pick up at a time when global supply begins to fall.
“Psychologically, $US5000 is a big, big number,” Stephen Briggs, a metals analyst at BNP Paribas, said. “If it actually ... stays below $US5000, then it’s sort of a point for further losses.”
Tuesday’s losses were triggered by a sell-off on the Chinese stock market, which ended the day down 6.2 per cent. Commodities have also been hit by China’s surprise decision to devalue the yuan last week, making dollar-denominated metals and oil more expensive for the world’s second-biggest economy.
The price of copper has now halved since its 2011 peak and is at levels not seen since 2009. Copper prices sank below $US3000 a tonne in 2008 before climbing to a high of $US10,190 in 2011.
Many analysts believe that copper still has further to fall given the current fears for demand in China. A slowdown in Chinese manufacturing and construction would significantly reduce demand in copper, which is used mainly for wiring, pipes and roofing.
“We can easily see a 10 per cent fall from current levels,” Atul Lele, chief investment officer at Deltec International Group, said.
The souring outlook on Chinese demand has led to bets on weaker copper prices. Speculative investors in copper futures and options have been net-bearish for 10 straight weeks, according to data released on Friday by the Commodity Futures Trading Commission. More recently, the number of open futures contracts has climbed to a record even as prices plumbed six-year lows, a sign that bearish traders are piling into the market.
“China’s economy is worse than thought ... you have people scared,” Ira Epstein, a broker with Linn & Associates in Chicago, said.
Investors also believe that an expected rise in US interest rates will spur further gains in the dollar, making commodities even more expensive.
The plunge in copper prices has sent the shares in some of the world’s largest miners tumbling while hurting economies from Chile to Zambia. Chile produces over 30 per cent of the world’s supply of copper, which was responsible for almost 10 per cent of the Latin American country’s gross domestic product in 2013, according to data provider CEIC.
Shares in US miner Freeport-McMoRan have fallen 83 per cent from its high in November 2011 while Toronto-based Barrick Gold has written off around $US4 billion from the value of a copper mine that it bought in 2011.
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Down under its call mining services... In Singapore its call O&G and offshore support
Mining services cheap, but no bargain
Date
August 20, 2015 - 3:36PM
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Stephen Cauchi
Business reporter
Mining and construction equipment has been hit hard by the downturn in mining. Photo: Philip Gostelow
Shares of mining services companies certainly look cheap, but that doesn't mean they're bargains, according to respected former fund manager Peter Morgan. Investing in the sector is "like trying to catch a falling knife", he warns.
There are about 70 listed mining services companies, including names such as Monadelphous, Bradken, Worley Parsons and Cardno, as well as over 300 sizeable companies that are unlisted.
A cursory examination of their share prices shows just how closely they've tracked the decline of the mining boom.
"Like trying to catch a falling knife": Peter Morgan.Photo: James Alcock
Engineering company Monadelphous, for example, was valued at $8.56 in August 2012; it's now trading at $2.55.
And the latest earnings season hasn't spread any cause for cheer. In the year to June 30, mining consumables group Bradken posted a $241.3 million loss, a sharp swing from its $21.5m profit last year.
Mr Morgan said years could pass before the sector improved.
"The cycle is going to take a long while to play out in terms of how poor it is at the moment," he said. "The way this cycle is playing out, it's going to be tough for a number of years."
Right across every commodity, except for gold, projects were based on commodity prices that were a lot higher.
"There will be value there but for a little while it will be like trying to catch a falling knife. I'm interested in it, but you've got to make sure you're not rushing in. You're definitely not going back to the heady times."
Charlie Green, a director at Hunter Green Institutional Broking, said mining services companies "have just been on the nose for so long".
"I know that people think there are green shoots, and eventually there will be green shoots, but if green shoots are appearing today, I ain't seen them," he said.
"The [companies] we've seen are pretty ordinary and none of them are talking bullishly about financial year 2016. Investors would be potentially front-running the real world."
Big miners like BHP and Rio were "smashing" their capital expenditure, said Mr Green, which meant less money for secondary industry players.
"It's the same [number] of people fighting over a smaller and smaller pie."
There was a strong relationship between miners' capital expenditure and mining services companies, he said.
"Calling it a 'tight' correlation would be overstating it, but there's a correlation. And if BHP and Rio are collapsing their capital expenditure plans there's less money to go around the industry."
Tim Schroeders, a senior fund manager at Pengana Capital, was even more bearish on the sector.
Mining services stocks "are not something I would want to look at at the moment," he said.
"Generally the ability to predict accurately earnings for these companies is fraught, the risk management of the companies is fraught, and the companies themselves are very opaque in their ability to foresee changes to their circumstances more than three months out.
"As a consequence of that, they're in the 'too-hard basket' for the time being."
From the desolation, merger activity could rise, Mr Morgan said.
"There will probably be some consolidation. You may get some opportunistic buying across the ones that are impaired. When the good gets thrown out with the bad, there will be opportunities."
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Mining and energy companies embrace the stackhat as commodities dive
DateAugust 25, 2015 - 7:04PM
[Image: 1406511161979.jpg]
Peter Ker
Resources reporter
Miners don't wear helmets just for safety while underground, they wear them for times like this.
As if being the worst-performed sector of the year was not bad enough, mining and energy companies were among the worst hit in Monday's market carnage.
Stock prices in the sector recovered somewhat on Tuesday, but in most cases the gains are merely taking the edge off the severity of the losses.
Prices for the commodities that mining and energy companies produce have been soft all year, but the slide has accelerated in recent weeks, as these eight graphs demonstrate.
Let's start with the bulk commodity that has become the bellweather for the entire Australian economy – iron ore.
In the context of recent years of extreme volatility and collapsing prices, the iron ore price has been fairly stable since the start of August, but it lost five per cent overnight.
Shares in Australia's biggest iron ore pure-play, Fortescue Metals Group, fell by 14 per cent on Monday.
The stock regained almost 5 per cent of that on Tuesday, but with the Shanghai composite market falling again, concerns about the company's most important market will persist.
Iron ore was never expected to be strong in 2015, but several other metals were, chiefly nickel, which was supposed to boom amid an export ban imposed by the world's biggest seller, Indonesia.
The Indonesian ban did support nickel prices in the first half of 2014, but it has been all downhill since, as amateur suppliers of low-grade nickel emerged in the Philippines.
Nickel is worth less now than before the Indonesian ban, and has halved since May 2014. It slumped again on Monday night.
Aluminium was also expected to improve on the back of the Indonesian ban, but it too has disappointed under oversupply, while tin has been a victim of the manufacturing downturn in China.
[Image: 1440465463093.png]
While Australians have been obsessed about iron ore's convulsions, the biggest commodities story on a global level is undoubtedly the oil price, which is less than half now what it was a year ago, when the Saudis decided to protect their market share rather than their profit margins.
Being less than $US50 a barrel is one thing, but being less than $US45 a barrel this week is an even bigger shock, and is ruining the energy hedge that BHP Billiton has traditionally enjoyed over rival miners.
The oil price collapse is delivering much lower earnings for energy companies this reporting season, and has left Santos running something akin to a fire sale.
Then there are the commodities that investors are optimistic about, like copper.
With little else to get excited about, mining investors have piled into copper recently, in the hope that a shortage of supply will emerge after 2017, as grades decline at existing mines.
The copper market was expected to be about balanced in 2015, yet the price for the conductive metal has fallen sharply against all indicators.
Glencore boss Ivan Glasenberg said last week it was strange for copper stockpiles and copper prices to be low at the same time, and he suggested the price collapse had more to do with synchronised short-selling in China.
Zinc is also in investors' good books, with the looming end of production at Queensland's Century mine expected to create a shortage in late 2015 and early 2016.
The Century mine, run by MMG Limited, is starting to wind down, but its impact is still being felt on markets, and when combined with a weak steel sector in China there has been no reason for zinc prices to rise.
So are there any winners out of all this? The answer is gold investors. Amid all the talk of market crises and another global financial crisis, global markets have flocked to the traditional safe haven in recent weeks
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The looming debt mining services companies don't want you to see
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[img=620x0]http://www.afr.com/content/dam/images/g/h/l/m/a/n/image.related.afrArticleLead.620x350.gjnnwv.png/1442383681715.jpg[/img]Australia's big mining services firms will struggle to generate enough cash to pay back looming debt maturities, Standard & Poors says. Philip Gostelow
by Amanda Saunders
Australia's big mining services firms face a struggle to generate enough cash to pay back huge looming debt maturities, Standard & Poor's says.
In the next four years, about $US1.7 billion ($2.38 billion) of the sector's capital markets debt will mature. That includes lump-sum payments of between $US250 million and $US485 million for Barminco and Boart Longyear in 2018, as well as Emeco, BIS Industries and Ausdrill in 2019.
"Refinancing risk will be a focus in the next few years, as weak cash flow generation will call into question mining services companies' ability to meet bullet debt repayments," S&P said in a new report on Wednesday.
"[They] have a delicate balancing act between reducing unused [credit] facilities, which carry additional costs, and protecting their liquidity position."
In addition to the $US1.7 billion in debt due across the sector by 2019, Transfield Services faces a $US325 million maturity in May 2020 and Boart Longyear has a further $US300 million due in April 2021.
Premiums are being paid for tenor and "covenant lite" facilities, like Fortescue Metals Group's expensive refinancing of $US2.3 billion of its $US7 billion debt pile in April this year.
There is "negative investor bias toward speculative-grade issuers exposed to the mining sector, demanding a higher margin premium compared to similarly rated entities that operate in less cyclical sectors".
S&P expects the sector's leverage peaked in fiscal 2015, mainly driven by the cut in operating and capital expenditure, but no "material reduction" in leverage is expected until the business cycle turns in mining.
The sector has excess capital invested. Five out of the eight mining services companies rated by S&P are on negative outlook.
"The negative rating bias remains high in the Australian mining services sector, even after multiple downward rating actions over the past 18 months."
The sector's credit quality is getting smashed on multiple fronts – including miners' cuts to capital spending on exploration and mining and moves to bring mining operations in house to cut costs. In addition, miners have deferred expansion plans. and "changed the competitive dynamics for new and existing contracts ... to share the strain and align incentives between the two groups".
"Competition for contracts has heated up amid the sluggish environment plagued by an oversupply of mining services providers and equipment," S&P said.
To survive, mining services firms have been forced to adopt "innovative" strategies like the profit-sharing agreement Atlas Iron struck with its contractors to return to production.
"Coupled with business diversity in some cases and capital flexibility, these innovative efforts have kept mining services companies afloat so far."
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