Two results yesterday, one in Australia and one in Indonesia, should give those resource bulls some food for thought, especially for nickel mining stocks.
Times are tough: the market’s slide in resources is firmly in bear territory, courtesy of the weakening oil price and rising US dollar.
But for the time being there’s more downside than upside.
Although the weakening Aussie dollar should be watched as that’s a good news/bad news story for miners, with the good news felt first.
The lower value (it’s off around 7% in the past month) provides an immediate boost to the bottom line, even if world prices are falling.
That’s for those companies moving their US dollar or euro based receipts back into Australian dollars. The bad news is more medium term as it will cost more to pay for things like capital goods, oil and fuel supplies and the like.
We reported on the change several months ago when the Government’s key commodity adviser, ABARE, produced figures for the March quarter’s export income from commodities that showed a sharper than expected slowdown in export returns, thanks mainly to price falls for the likes of lead, zinc and nickel.
Nickel has been one of the poor performers, with world prices plunging from well over $US54,000 a tonne 15 months or so ago to around $US17,400 now.
It’s been a substantial reduction, and will have an impact on the 2008 financial result of the likes of Vale (Inco), BHP, Xstrata (Inco) and a host of small companies.
Vale and BHP will be grateful they have booming iron ore (and coal and oil in the case of BHP). Nickel was one of BHP’s biggest profit centres in the 2007 result.
Vale was grateful as it revealed a 22% rise in second quarter earnings, thanks to huge profits from iron ore. Revenue from iron ore was up 72%, revenue from nickel dropped 41%. BHP’s results will mirror those gains and losses when it reveals its full 2008 results shortly.
But results from Minara Resources and the 60% owned Xstrata subsidiary, Inco Indonesia, have given a very clear picture of the damage the price slump can do, especially when allied to the now endemic cost pressures being felt throughout the sector, plus the strong Aussie dollar (in the case of Minara).
Minara is Australia’s second largest nickel producer and owns and operates the Murrin Murrin nickel cobalt joint venture project (60% Minara, 40% Glencore International AG).
The Murrin Murrin operation is located near Leonora in Western Australia’s northern goldfields region. It was once run by Andrew Forrest, now of Fortescue Metals fame.
Minara yesterday reported an 80% drop in interim profit, thanks to the twin pressures of lower prices and rising costs.
The company told the ASX that earnings for the June 30 half year fell to $49.2 million, compared to nearly $246 million in the first half of the previous year.
The fall was due to the slump in the nickel price, allied with higher sulphur and energy costs.
Revenue for the half dropped 46% to $284.5 million from the $529.9 million in the corresponding period of 2007.
Minara shares climbed 2c, then fell 2c to $1.47, and then ended square at $1.49.
The result didn’t take the market by surprise, with the plunge in the nickel price there for everyone to see.
Nickel output for the half was 15,022 tonnes, while cobalt production was 999 tonnes. Murrin Murrin is expected to produce up to 35,000 tonnes of nickel for the full 2008 year, although it could be as low as 31,000.
The company said a strong cobalt market had offset some of the cost pressures.
Cash costs rose 6.3% to $US5.24 per pound of nickel in the half.
The Murrin Murrin plant lost five days of production and was forced to operate at half to two thirds of capacity for the remainder of the month of June after the Varanus gas plant explosion and closure.
The company said that: "At 30 June 2008, cash on hand totalled $66.0 million.
"The company remained debt free with a strong balance sheet.
Minara has experienced a range of cost pressures including escalating prices of inputs such as sulphur and gas, a decline in the nickel price and a very strong Australian dollar.
"As a result, the Board has taken a conservative financial management approach and has not declared a dividend for the period."
Meanwhile PT International Nickel, the country’s largest producer of the metal, shared some of Minara’s pain with a 58% drop in first-half profit because of lower metal prices.
The company said in a statement that first half earnings for 2008 net earnings dropped to $US295.6 million from $US707 million in the same six month period of 2007.
Revenue also slid sharply to $US819 million from $US1.3 billion a year earlier.
The company is 60% owned by Value (CVRD) of Brazil, which obtained the stake through its takeover of Inco.
Three month nickel for delivery on the London Metal Exchange averaged $US27,476 a tonne in the six months to June, down from $US42,173 a tonne in the same period of last year.
The price is now $US10,000 a tonne below the first half level and looking weak.
Inco Indonesia also had a cost problem, with a 26% rise in the half year, along with forex losses of more than $US200 million (down sharply from a year ago, according to the company).
