17 April 2014
Recent news headlines from the
mining sector tell a story of an
industry that is actively managing its
margins by vigorously pursuing
increases to productivity while
expanding sales.
Rio, BHPB and Fortescue have all announced record iron ore sales. At the
same time, BHPB has been able to reap USD4.9 billion in cumulative cost
reductions. On the other side of the coin, the head of BHPB Coal recently
signalled a new round of cost reductions, citing ongoing weak coal prices.
This focus on cost reduction and capital returns is the new norm for mining. It
is expected that 2014–16 production from expansion projects will result in
more downward pressure on margins in the already well supplied iron ore and
coal markets.
While mining companies have cut back on their internal costs, it is the many
firms that make up the mining services sector who are feeling most of the pain
of these cost reductions. The recent round of financial reports by listed
companies – when coupled with industry statistics – reveal a sector that is still
facing considerable financial pressures.
Industry observations
The December 2013 quarter industry metrics in Australia signal different
trends by exploration and development activity type.
Greenfield project expenditure fell 33 per cent year-on-year, with a 28
per cent decline in the fourth quarter confirming that the pace of
contraction has not slowed.
Brownfield project expenditure also declined by 33 per cent
year-on-year, although activity in the fourth quarter was down only 6 per
cent and has been broadly flat over the past six months. Brownfield
activity accounts for two-thirds of all exploration spending.
Year-on-year state exploration expenditure reflected the national
decline, even though quarterly rates of change varied. WA dominates
mineral exploration with 56 per cent of Australian expenditure, although
year-on-year activity decreased by 34 per cent.
In terms of commodities, base metals exploration activity suffered the
greatest decline (53 per cent). Iron ore, coal and gold account for threequarters of all exploration activity.
Interestingly, ABS data shows that although the mining sector shed 16,000
jobs in the financial year ending June 2013, by December 2013 employment
had recovered to the peak levels of early 2012.
Company performance patterns
The 2013 ASX reporting season concluded on 28 February. A basic
Mining services that support
core mining production
activities appear to have
reached their low point,
although there is a residual
downside for those contracted
to any high cost or financially
leveraged mine or in the coal
sector.
comparison of two companies highlights the divergence of mining services
supporting operations and those supporting new development.
Emeco dry hires large mining equipment (shovels and haul trucks) where
demand is driven by peaks and troughs in mine plan activity, often associated
with overburden stripping rate. The company’s fleet utilisation is a barometer
of core, but deferrable production mining services.
Emeco’s fleet utilisation reached a trough in late 2013 but has started to
recover. The company stated that it is receiving enquiries from miners
restarting deferred overburden programs.
Source: Emeco 2014 Interim results, market presentation 20 February 2014
In underground mining, deferrable core production services include shaft
maintenance and ground support bolting.
Conversely, Boart Longyear’s drilling rig utilisation continued to fall well below
the previous low of 2009. Greenfield and brownfield exploration projects
account for 69 per cent of the company’s revenue.
Source: Boart Longyear 2014 Interim results
Conclusion
Mining services that support core mining production activities appear to have
reached their low point, although there is a residual downside for those
contracted to any high cost or financially leveraged mine or in the coal sector.
Those service companies relying on exploration, development and new
construction activity remain in a declining market that is unlikely to find rock
bottom this year.
Darren Weaver
Partner, Perth
+61 8 9214 1407
Stewart Howe
Mining and energy
specialist
+61 3 9600 4922
Peter McCluskey
Partner, Melbourne
+61 3 9604 5109
Morgan Kelly
Partner, Sydney
+61 2 9286 9874
Tim Michael
Partner, Brisbane
+61 7 3834 9228
Andrew Rogers
Mining Specialist,
Brisbane
+61 7 3834 9299
Ferrier Hodgson’s Resources team regularly sends a Resources Postcard detailing the latest news and trends in the resource sector.
If you have any comments or suggestions, please contact Darren directly at [email protected]. If you know of others you
think would be interested to receive the Resources Postcard, please send us their details.
If you would like to change your subscription details click here and select "Want to know More?".
If you wish to see previous editions of the Postcard click here.
For more information about our se rv ice s, ple ase contact one of our office s. Or find out more at:
www.fe rrie rhodgson.com:
Sydne y: Steve Sherman
+61 2 9286 9905
[email protected]
Ade laide : Martin Lewis
+61 8 8100 7657
[email protected]
Pe rth: Martin Jones
+61 8 9214 1405
[email protected]
M e lbourne : Peter McCluskey
+61 3 9604 5109
[email protected]
Brisbane : Will Colwell
+61 7 3834 9205
[email protected]
Singapore : Tim Reid
+65 6416 1400
[email protected]
M alaysia: Andrew Heng
+60 3 2273 6227
[email protected]