Rally not a fad
Wednesday 16 March 2016
Despite the fluctuations this week, mining analyst Peter Wright from Bizzell Capital Partners
says investors are finally recognising the enormous cost improvements that have occurred in mining businesses across Australia.
Since the turmoil that gripped the share market in January, mining stocks have rallied with companies like Fortescue and Whitehaven Coal increasing in value by 100% and 150% respectively.
Mr Wright believes this represents a broader realisation that it is not the end of the world for mining.
“I think the market needs to see a bottom, which it can use as a point of reference,” he told Shift Miner.
“I think oil prices at $25, Iron ore at $40, thermal coal at $50, met coal at $90 - all these are now being interpreted as the bottom of the market.
“I don’t dispute that China's growth is levelling out - but people forget the aggregate size of the economy is double what it was at the Beijing Olympics and even with slowing growth on double the economy - demand is monstrous, and ultimately the world needs things like Coal, Nickel, Uranium and Iron Ore.
“When you think the small resources index has gone from 1200 to 1500 in the last few weeks - which is back from a high of 6900 you start to think there is some reality re-entering the market” Aside from market dynamics, Mr Wright says there have been astonishing achievements in lowering costs, and some small but promising signs on price.
“The focus on low oil prices has overshadowed the reality on the ground,” he said.
“Diesel and labour form a huge part of the cost structure for mining companies and the fall in prices for both these items have been amazing.
“One mining company I have been working with was paying $14 per tonne freight just over a year ago to land their products in China, now that price is $3.60.
“And you have Fortescue saying they can land iron ore in China for $28 a tonne - that's all in, and everything after that goes on the bottom line.
“And for the first time we are seeing the pricing contracts just starting to edge up and we haven't seen that in a long time.”
In light of his cautiously optimistic view of the future, Mr Wright believes Stanmore Coal’s big punt on the Isaac Plains mine could be a very well-timed investment.
“I think Stanmore have got in pretty close to the bottom of the market, and even on a worst case scenario, I think the Isaac Plains transaction is going to be a really good transaction for them.
“Through the history of mining, there have always been some massive deals done at or around these inflexion points in the market.”
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