Resources stocks get a health check – and the diagnosis is good
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An uptick in commodity prices and strengthening balance sheets will prompt Australian miners to spend more money on projects in 2018 than they have in a long time.
That’s the prognosis from RBC Capital Markets mining analyst Paul Hissey in the latest sector research report.
“We would expect an uptick in capex/investment in coming periods, especially given the improved health enjoyed by most of the sector, following on from a narrow escape in FY16,” Mr Hissey said.
“We have already seen this is some circumstances, where prices have assisted in margin recovery; companies have committed extra capital to ‘buy’ further life at maturing assets.”
The comments come ahead of first-half financial year results, which are due out at the end of February.
For investors looking for validation that the sector has healthy statutory accounts (and cash flow), this is an important earnings period.
RBC will be keeping a close eye on cost guidance, particularly after most companies met or beat their targets in the December quarter.
“At this point in the cycle we would normally expect cost pressures to rise, firstly on the fundamental outlook (labour, mining services) and secondly due to other exogenous factors (electricity, oil and currency impacts),” Mr Hissey said.
“Given this has not materialised (in unit costs at least), we await this reporting period to assess the impact on audited costs (above what is reported in quarterlies).”
The revival of the sector has been largely driven by further gains in most base metals and bulk commodities in the second half of last year.
The end of 2017 saw a “renewed enthusiasm” for materials, with synchronised global growth, and ongoing recoveries in both emerging and developed economies, combined with a weaker US dollar driving commodities higher, Mr Hissey said.
Miners have been focused on driving down debt and stockpiling cash in order to reinforce their balance sheets and give back to shareholders.
They are now considering how best to position themselves for the next stage of the investment cycle.
Cash flowing already in 2018
The market once again appears to be open to resources players, with the number of new floats this year well on track to beat the 15 done in the first six months of 2017. Several companies have pocketed more cash than expected in recent capital raisings.
“I’d have to say that 2018 looks like it will be a bigger year at least for the delivery of IPOs than 2017, and quite probably larger amounts of money raised as well,” Hedley Widdup, a fund manager for investment firm Lion Selection Group, told Stockhead recently.
Pilbara-focused conglomerate gold player Artemis Resources (ASX:ARV) has increased its initial $4.5 million capital raising twice to $9 million on strong institutional shareholder backing.
Emerging heavy rare earths producer Northern Minerals (ASX:NTU) doubled its recent share purchase plan to $10 million after receiving applications exceeding the original $5 million target.