AFR reports “There’s more to come in mining investment splurge”

Project & Industry News

“Australia’s miners might be finally loosening the purse strings, but don’t for a moment think they’re about to spend like the proverbial drunken sailor” – James Thomson – The Financial Review.

That was the message from BHP’s Australian mining boss Mike Henry, after he announced on Friday that the company would spend $4.8 billion to build South Flank, the biggest iron ore mine the Pilbara has seen.

“We’re able to leverage existing infrastructure. We’re replacing existing production, so it allows us to maintain what is already a strong business. There has been a real focus on ensuring that we choose the right quality in terms of the underlying resource to allow us to expand margins and through expanding margins improve return on capital employed.

“And then the final point I would note is that there has been a real focus on ensuring that we’ve designed a lean project here. So it’s not a project that we’ve gone into with any intent of gold plating.”

 

 

Former BHP executive Graham Kerr, now chief executive of South32, had a very similar message on Monday when he announced the company would spend $1.9 billion to take control of Arizona Mining, the owner of a exciting zinc, lead and silver project in that US state.

Kerr said South32 has been hunting for deals but has refused to get into bidding wars where prices have become overheated. Arizona Mining was the best opportunity his team had found – but the process took three years.

The BHP and South32 announcements add to a sudden spurt of mining investment that brings back memories of last decade’s golden period.

A few weeks before BHP’s announcement, Fortescue Metals Group announced it would spend $US1.3 billion on a new Pilbara mine called Eliwana. There’s also a raft of investment started or proposed in Western Australia’s lithium sector, the $1 billion Carrapateena copper and gold mine being built in South Australia by Oz Minerals, Rio’s $US1.9 billion Amrun bauxite project nearing completion in Queensland and the $1 billion Olive Downs coal mine being built in the Bowen Basin by private equity firm Pembroke.

Gina Rinehart’s $390 million bid for the back-from-the-dead iron ore minnow Atlas Iron has only added to the sense that mining is heating up again.

South 32 chief executive officer Graham Kerr spent three years hunting for the right deal. Mark Griffin

But it is important to understand the context here. Australians miners have not suddenly become profligate but are finally getting the opportunity to dust off investment and growth plans, having largely healed the wounds created by the end of the mining boom earlier this decade.

Thanks to a somewhat unexpected jump in commodity prices – driven partly by unexpectedly high demand from a polluted China for Australia’s best-quality iron ore and coal, and partly from a lack of new supply being developed in the wake of the commodity bust – financial conditions in the sector are good.

A recent report from PwC showed the world’s 40 biggest miners boosted underlying earnings by almost 40 per cent last year to a total $US146 billion. But the total revenue of this cohort grew by just 23 per cent, emphasising how tightly the miners have been able to control costs.

Better balance sheets

This improved financial situation has allowed the miners to do two things.

First, balance sheets have been repaired – and then some. BHP’s gearing is at or close to its target level, while Rio’s debt is well below its target. South32’s books are brimming with cash, to the point where it will still have some left over after completing the Arizona deal.

The second impact of the improved financial position of the sector has been to allow the miners to reward shareholders for their patience. Rio, South 32, BHP and Fortescue have all increased capital returns via dividends, share buybacks or both, and there will be more to come.

So with cash flows improved, balance sheets repaired and shareholders largely sated, investing is back on the agenda.

But, as Henry argued, this is not spending for the sake of it. Most of it is about catching up on investing that could not be considered during the dark days of the bust.

In the case of BHP and Fortescue’s new projects, both will replace existing mines that are coming to the end of their lives. Similarly, South32’s Arizona project will replace its Queensland zinc, lead and silver mine called Cannington, which has about 10 years before it is shut down.

So the impacts on the broader market of these new projects will be muted. BHP or FMG are not looking to put new tonnes of iron ore into the market, which would naturally weigh on price. Instead, they are looking to sustain and improve their existing businesses.

Of course, history says that rational investing by the mining sector will eventually become irrational exuberance, where companies pay too much to buy or build projects. Glencore founder Ivan Glasenberg has been a long-time critic of the mining sector’s capital allocation skills, claiming the big miners spent as much as $US1 trillion in capital expenditure through the boom but failed to get satisfactory returns.

But mining deal maker Jason Cheng, the co-founder of specialist mining private equity firm EMR Capital, says there are no signs the market is becoming irrational at this point.

Cheng, who teamed up with Adaro Energy to buy Rio Tinto’s Kestrel underground coal mine for $US2.25 billion in March, says investment has been running so low for so long that there is a huge catch up needed in many commodities.

He gives the example of the copper sector, where underinvestment has been so rife that global copper production will likely fall this year – at a time when the world has never needed more copper, in everything from electric cars to renewable energy projects.

“We think the expenditure is not overstated; if anything it is undercooked,” Cheng tells The Australian Financial Review.

“I think you’ll see more activity in the next 12 months or the next 24 months. I think there needs to be more deals, more investment.”

Article originally published in Australian Financial Review 21st July 2018

 

Is your resume ready for the next big opportunity? Get a free appraisal now.

 

APPRAISE MY RESUME

 

Follow

About the Author

Mark Daniel is an international career counsellor and resume writer. Currently based on the beautiful Sunshine Coast in Australia, he is the co-founder of Hi Vis Box, the Hi Vis Club and the Hi Vis Hub, advising clients across the world. Predominately working in the oil & gas, mining and civil engineering sectors, he is a prolific publisher, contributing to a range of international industry magazines and his blog for over 20,000 LinkedIn followers. Proactively supports people throughout all stages of their career, but has been known to struggle if they support Manchester City.

>