Pic: Getty
Mining
Australia’s iron ore miners are doing very well right now.
BHP (ASX:BHP) made more than it ever has in a first half in 2022, funding a record $10.7 billion interim dividend, FMG (ASX:FMG) founder Andrew Forrest picked up almost $1b in dividends among a $2.65b FMG payout and Rio Tinto (ASX:RIO) is likely to announce another monster profit in its full year results tomorrow.
That’s of great concern to China, which is in a cold trade war with the Australian Government and ain’t too happy seeing so much capital flowing from the steelmaking country into the coffers of the iron ore majors.
After successfully pulling down prices from records of US$237/t last May to 12 month lows of US$87/t in November by crippling its billion tonne a year steel industry with artificial output restrictions, the Communist Party was most displeased with a run back to US$150/t earlier this year.
That was fuelled by expectations of rising Chinese steel demand which Chinese authorities predictably blamed on speculation.
They now appear to have gone a step further, with Bloomberg reporting plans by the National Development and Reform Commission are being drafted to take iron ore purchases in-house.
That would theoretically give China much more price setting power compared to the free market system that has operated over the past decade, which has seen prices linked to spot purchases reported by third party agencies like Platts and Fastmarkets.
Instead a single state owned purchaser would control purchases of iron ore. That could have a big impact on Australia and our largest companies given Chinese steel mills and traders bought 693Mt, or 61% of its iron ore imports, from Australia in 2021 worth more than $150 billion.
Commbank analyst Vivek Dhar said a centralised buying platform could give the Chinese Government more purchasing power.
“China accounts for 70‑75% of the world’s iron ore imports, but this power is rarely consolidated given the fragmented nature of China’s steel sector. Mergers and acquisitions amongst China’s large steelmakers are expected to continue,” he said.
“This should eventually see China’s influence on iron ore prices increase and ultimately challenge the pricing power held by iron ore producers (where market concentration is stronger).
“Plans to invest and develop iron ore mines outside of China, like the Simandou project in Guinea, as well as boosting scrap steel usage, should see China’s exposure to iron ore markets lessen in the longer term.”
Losses across the iron ore sector helped drive the materials sector almost 1% lower as Russia’s decision to send “peacekeeping forces” to the Eastern Ukraine impacted markets.
One spot in the resources sector that did enjoy the volatility today were the gold miners.
Gold rose 0.5% to US$1908/oz this morning as news broke of Putin’s latest move in the chess game over Ukraine.
Northern Star (ASX:NST) was the big mover, climbing 4.22% or 41c to $10.11, its strongest share price since November.
Australia’s second biggest gold miner has ridden Russian jitters to a more than 13% gain over the past week.
On the flip side Regis Resources’ (ASX:RRL) earnings today continued an uncomfortable trend of underperformance from Australian gold miners with ageing assets and rising costs.
A regular dividend payer for several years, Regis dumped its payout for the first half of 2022 despite consensus expectations of a 3.3c per share distribution.
It came as underlying NPAT fell from $78 million in H1 2021 to $44m in H1 2022 and EBITDA fell from $233m to $221m.
Regis has been hit by rising costs and a rockfall at its Duketon operations that prompted a guidance downgrade last month, while the approvals process and financial investment decision at its McPhillamy’s project in New South Wales continues to drag on.
Regis boss Jim Beyer indicated the company, which also paid $900 million for 30% of the Tropicana gold mine in WA last year, would be maintaining its cash for capex demands and would review a full year dividend later down the line.
The company is expecting a turnaround in fortunes in the second half, but faces a number of challenges including the potential growth of Omicron Covid outbreaks in WA where its two mining operations are based.
“It has been a difficult first half for us, it’s very clear and without wallowing around in it, you can see what’s happened over the last six months or so. We don’t have a policy on dividend payout or dividend ratios,” Beyer told analysts on a conference call.
“We will consider at the end of this half how the business has performed. We will be looking at what the outlook is for gold price. I mean it’s certainly very strong at the moment which is pleasing to see.
“I’m not sure whether some of the reasons behind that is … always instability gives us a strong gold price. But we will look to see how the longer term capital demands are for the business. Clearly there’s McPhillamy’s sitting out there so we will take a look at this in six months time, five months time.”
Regis delivered 210,270oz of gold for H1 FY22 at an AISC of $1,527/oz, with full year guidance of 420-475,000oz at $1,425-$1,500/oz.
RBC’s Alex Barkley told clients the loss of the dividend would be a short term shock, but for the mid-tier pursuing growth options should take preference over payouts.
“We see value accretive growth options as an appropriate preference for funding,” he said.
RBC has a $2.25 price target and outperform rating on the $1.5b capped gold miner.
Digging is good business at the moment for mining services players, who are benefitting from an uptick in work around the Australian resources sector.
After MACA (ASX:MLD) announced a 14% increase in net profit to $22.2m on Tuesday including a sharp 80% revenue jump to $841.1m, Monadelphous (ASX:MND) and Perenti (ASX:PRN) have followed suit with their own profits.
Perenti reported a turnaround of $86 million in statutory NPAT from a loss of $44.5m last year to a profit of $41.5m in H1 2022, although underlying NPAT was down from $44.6m to $34.9m in the same period despite marginally higher EBITDA ($201.8m) and revenue ($1.192b).
It also disappointed shareholders by maintaining its position dividends are not forecast in FY22 due to its high debt levels (net debt of $522.5m).
Monadelphous meanwhile declared an interim fully franked dividend of 24c a share after reporting a 17.7% rise in NPAT to $30.1m, with revenues up 12.3% to $1.065 billion despite challenges posed by labour shortages and Covid-19.
MD Rob Velletri said the outlook for metals was positive.
“The resources sector will continue to provide opportunities, with the Australian iron ore industry remaining particularly buoyant,” he said.
“The demand for battery metals is forecast to remain strong and conditions in the energy sector are expected to continue to show an improving trend.”
“The renewable energy market and developments in the hydrogen sector will also provide opportunities over the longer term.”
Mining
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