Miners victim of their own ‘over-promotion’

Miners victim of their own ‘over-promotion’

  • From: The Australian
  • September 29, 2014 12:00AM

RESOURCES companies should blame themselves and their history of over-promotion, rather than cooling commodity prices, for the steep downturn in mining stocks.

That’s the view of Bert Koth, the managing director in Australia for the $US7.9 billion-plus ($9bn) Denham Capital private equity group, who believes it will be some time before investors are again prepared to back the resources sector with the same gusto seen over much of the past decade.

Australia’s resources indices have fallen by almost 40 per cent since peaking in 2011 and equity funding in the sector has dried up, leaving smaller explorers battling to survive.

Speaking to The Australian, Mr Koth said blaming the funding crisis on falling commodity prices ignored the mistakes the industry had made during the boom.

“It’s not because China is growing a little bit slower, it’s not because there was or is a debt crisis in the US and Europe, to a significant degree it’s because the industry was over-promoted,” Mr Koth said. “When you set inflated expectations and they don’t come to fruition, people abandon the sector.”

Studies by Denham found that an investor backing every single initial public offering in the resources sector over the past five years would have lost more than 60 per cent of their money.

“In a city like Perth, where there’s a lot of punters, their portfolios are down 70 per cent. If you lose 70 per cent of your money on something, how long does it take before you invest again in the same thing with the same people? It might take a while.”

The continued plunge in the iron ore price this year meant the resources sector was at an “inflection point”, he said, where listed companies that were low on cash may finally go under.

“Everyone was hinging on the belief that in six months everything would be better. But with iron ore price forecasts down to $US70 to $US75 (a tonne), it’s going to depress the whole market confidence even further and undermine any residual optimism in the system,” he said.

The current malaise in the resources sector was likely to prevail for some time as demand gradually caught up with supply.

Mr Koth noted that about 95 per cent of new copper and iron ore supply on the drawing board around the world came from projects with a forecast capital expenditure of more than $1bn.

Around half of those $1bn-plus projects were in the hands of junior to mid-tier companies with little likelihood of securing funding, while the mining giants owning the balance would be very cautious about putting more money into new projects.

“Macroeconomically that’s going to mean eventually demand will meet supply,” Mr Koth said. “That’s not going to happen tomorrow, and I’d argue you’re talking multiple years rather than multiple months. So, I don’t see any swift recovery.”

The upside of a prolonged downturn in the resources sector would be some relief in operating and capital expenditure pressures across the industry.

Mr Koth said that of the more than 500 mining projects that Denham had looked at in recent years, only “a handful” made financial sense. He said there were opportunities for companies to reduce their cost bases in the current climate by addressing overstaffing, renegotiating rates with mining contractors and taking advantage of the new-found availability of geological staff. “Industry-wide I think there’s at least a 10 per cent opex and 20 per cent capex reduction potential in Australia,” he said.

About prosperitysaskatchewan

Consultant on Saskatchewan's natural resources.

Posted on September 29, 2014, in Uncategorized and tagged . Bookmark the permalink. Leave a comment.

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