| |
More boom yet in commodities
David McKay
Posted: Wed, 15 Jun 2005
[miningmx.com] -- ONE of the interesting discoveries of a recent mining report by PricewaterhouseCoopers is how much cash the world’s mining companies are generating. The report, which surveyed 40 companies, showed that cash flows from operating activities nearly doubled in 2004 to US$41bn.
It’s on that basis that PricewaterhouseCoopers reckons merger and acquisition activity is likely to continue in the mining sector, partly because it’s one way of safely deploying cash.
Special dividends are another means. However, the paucity of new reserves following years of underinvestment in exploration means that finding replacement tons and ounces is crucial.
The mining industry also doesn’t traditionally conduct cash payouts well. Even the share buyback programme unveiled by BHP Billiton for its Australian-registered shareholders hasn’t benefited shareholders on the London
register, says John Clemmow, a banker at Investec.
It’s quite amazing how much free cash is actually being generated by mining firms. According to RBC Capital Markets, cash flows from the world’s top four mining firms – Rio Tinto, BHP Billiton, Anglo American and Xstrata – will be at record highs and result in zero net debt in 2006. The combined free cash (after dividends and capex) for these companies will be $13,7bn, $13,5bn and $10,5bn in 2005, 2006 and 2007 respectively.
Clemmow says: “That would total a staggering $38bn over the next three years – greater than the market cap of Anglo at $33bn.”
Take that down to a daily basis and the cash-generating capacity is no less startling. British stockbroker Numis Securities found that at current metal prices, Antofagasta, a mid-cap mining stock listed on the London Stock Exchange, generated £2,2m/day in profits – equal to R26,4m/day. Xstrata, which is three times as large by market value, is generating £6m/day in net
profit. That all pales into insignificance when measured against BHP Billiton, which is making £22m/day in net profit at current metal prices.
The key question is: How long are current metal prices likely to continue? There seems no end at the moment.
Hugh Cameron, PricewaterhouseCoopers’ global mining leader, says that 2005 promises to be as lucrative for mining companies as the previous year – optimism predicated almost exclusively on the climbing importance of Chinese industrial production and subsequent demand.
Says Cameron: “The booming Chinese economy is worth 4% of global gross domestic product and consumes 30% of coal production.” It also consumes a third of all steel production and 13% of all electric generation. Attempts to secure its own lines of supply have also seen some $1,9bn in offshore investment by Chinese companies since 2003. Inward investment was $336m. “A continuing strong demand is expected,” Cameron says.
But there are clouds on
the horizon. Chris Lancaster, an analyst at RBC Capital Markets in Sydney, calculates that the massive market surplus for iron ore – the material that helps make steel – is expected to move into oversupply during 2006/2007. Chinese iron ore imports increased 25% in first-quarter 2005. That’s 252m t on an annualised basis, or 40% of seaborne trade.
However, massive expansions by Rio Tinto, BHP Billiton and Companhia Do Rio Voce (CVRD) could change all that. Says Lancaster: “As a result of a forecasted market oversupply from 2005 and beyond, we forecast iron ore prices to drop by 27% for lump and 24% for fines in the Japanese 2006 financial year.”
There’s the risk that projects are not delivered on time, but in this sector of the mining industry the fear of a traditional boom/bust cycle breaking out looks likely.
Cameron wouldn’t be drawn with regard to forecasting the continued strength of the Chinese market. “If I knew that I’d be retired somewhere.”
But
the predicament of SA mining companies is a crying shame. All in all, they’ve seen their market values shrink by 9% during 2004. Revenue in US dollar terms has been 44% higher. However, when translated into stronger rand the increase is a disappointing 3%, Cameron says. Overall, SA mining firms saw profits fall 23% in dollar terms and 42% in rand.
One promising prospect is that metals prices may have broken their connection with the US dollar, says John Meyer, of Numis Securities. That will be positive for SA-domiciled companies where the rand has weakened, partly owing to a stronger US dollar. “Metal prices now appear better determined by the absence of physically available metal in the official market,” Meyer wrote in a recent note.
Higher grade mining news. Straight to the point. Straight to your mailbox. Subscribe now for miningmx's free news alerts.
| |
