Issue 152 | February 2016
Welcome to the 152nd edition of the Deloitte WA Index, a monthly review of Western Australian stocks and indices.
- Download WA's Top 100 listed companies
- Commodity Review
- Performance of WA Index and global indices
- WA Index movement
- Top performers of the month
Download the list of WA’s top 100 listed companies, as of 31st January, explore the sections below and if you don’t currently receive our WA Index, please register to be added to our distribution list.
- Commodity review
- Performance of WA Index and global indices
- WA Index movement
- Top performers of the month
- Distressed mines
If you have any questions in relation to the Deloitte WA Index please contact Angela McIlroy.
The beginning of the New Year has seen old patterns continue as prices of many key commodities continued their downward trend.
China’s slower industrial growth, coupled with increasing oversupply in the market, forced oil prices to plummet to a 12 year low, hitting a price of US$27 a barrel before experiencing a slight recovery towards the end of the month. Meanwhile base metal prices have been the centre of speculation, with analysts predicting low prices will rebound in the next quarter. Withstanding the negative movement was gold, having achieved an increase of 5.2% and recovering from its 6 year low revisited in December 2015.
Despite recent speculation that OPEC (Organization of Petroleum Exporting Countries) would cut oil production output by 5%, no emergency meeting has been convened amidst this low price environment. Determined to maintain its market share, Saudi Arabia is not expected to implement cuts unless other prominent producers in the market, such as Russia and Iran, follow suit. Petroleum producing countries have subsequently, in an increasing number of, been forced to cut spending and utilise fiscal reserves as government revenues diminish and currencies depreciated2. Having a correlation with LNG prices, the decline in the crude oil price has also placed substantial pressure on Australia’s gas prices.
Iron ore, of particular importance to Western Australia’s economy, fell 2.3% to end the month at US$42.80 due to the Chinese industrial slow down and the associated decrease in steel production. This was further intensified by the jockeying for market share among the world’s largest ore producers, increasing the availability of low-cost supply in the market with new mines coming online, placing significant pressure on higher-cost producers.
Precious metals palladium and platinum are also bearing the brunt of China’s slowdown including its recent stock market selloff, with palladium falling by 9.7%. Significantly Russia’s central bank has been in prolonged negotiations to sell stockpiled palladium to Russian based company MMC Norilsk Nickel, as part of a Global Palladium fund. Norilsk Nickel had originally proposed this deal to the central bank as part of its efforts to guarantee stock availability for long-term customers and to increase market transparency, however the current state of palladium prices however has deemed it an unsuitable time for the deal to be actioned. Platinum similarly has sunk to its lowest point in seven years, landing at US$865.8/troy oz. South Africa’s failure to slow production in the oversupplied market has been further assisted by the declining Rand against the strengthening US dollar.
Copper prices continue to reflect concerns surrounding China’s future demand, as the world’s biggest metal consumer continues to falter. Although December saw China’s copper imports reach a seven year peak, it has now been realised that a substantial portion of their consumption has been stockpiled as loan collateral. One of the largest US mining companies, Freeport McMoRan Inc, failed to extend its export permit at Freeport’s Grasberg mine in Indonesia, which could potentially lead to an increase in copper prices due to the restricted supply. Investors remain sceptical, however, that the Indonesian government will prohibit the operations of one its largest taxpayers.
Nickel stockpiles reached the highest point in more than two months whilst the demand for stainless steel declined. The effect was apparent in the suspension of West Australian operations at Savannah, Mariner and Miitel mines causing more than 100 job losses.
Coal endured a 3.5% drop closing at US$48.9 per tonne. This coincided with Rio Tinto Limited’s sale of its Mount Pleasant mine in the Hunter Valley of NSW to MACH Energy Australia Pty Ltd for US$224.0 million plus royalties. The transaction has been initiated at a time where thermal coal prices have reached 9 year lows, followed by frequent mine shutdowns and millions of tonnes of production being eliminated from the market.
The standout positive movement for the month was exhibited in the gold price which experienced an increase of 5.2%. The commodity achieved its highest monthly gain in a year after an undesirable December which was sparked by concerns around the health of the global economy, and Japan’s implementation of negative interest rates Whilst China’s slowdown has played heavily on industrial metals, the demand for safe havens gold and silver has ultimately benefited.
Commodity and Precious Metal Prices
WA Index movement
The Deloitte WA Index decreased during January 2016, with the market capitalisation of Western Australian listed companies falling by 2.2% and closing the month at AU$119.3bn.
Among major Index players:
- Brockman Mining Limited’s market capitalisation decreased by AU$243m (down 20.9%) to AU$922m due to the fall in the commodity prices, specifically iron ore
- Programmed Maintenance Service Limited’s market capitalisation fell by AU$115m (down 18.6%) to AU$501m following the drop in the commodity prices plus announcing to the market the sale of their vessels for AUD$25m which was picked up as part of the acquisition of Skilled Group
- Saracen Mineral Holdings Limited’s market capitalisation rose by AU$87m (up 18.0%) to AU$571m after delivering strong quarterly production results and indicating that their goal of doubling production will be reached earlier than expected.
All equity markets surveyed slumped during January:
- The All Ordinaries fell 5.4%, the combined effects of the slump in oil prices and the latent repercussions of the increase in interest rates by the Fed last month saw most blue chips affected including the big four banks, BHP, AMP and Macquarie Group
- The FTSE 100 followed suit given its significant exposure to the resources sector, decreasing by 5.3%, with significant losses coming in early January as Chinese trading halts designed to prevent abrupt share losses inadvertently triggered negative sentiment in other global markets
- The S&P 500 fell 6.9%, impacted by energy companies suffering from the drop in oil prices and decreased foreign revenues as a result of the appreciating American dollar
- The Nikkei posted the biggest decrease, with a fall of 12.2%, which was again due to the Chinese slowdown and falling oil prices.
The top Deloitte WA Index Movers and Shakers in January included:
Galaxy Resources Limited (GXY) - posted a 52% increase in market capitalisation, up from AU$147m to AU$223m. The shares rose as General Mining Corporation Limited (GMM) set out its planned $7 million spending program for the Mt Cattlin mine in Western Australia which is owned by Galaxy. GMM has a deal with Galaxy under which it was granted the right to solely operate the project and which also includes an option to purchase 100% of Mt Cattlin at any time during the next three years.
ResApp Health Limited (RAP) - posted a 38% increase in market capitalisation, up from AU$59m to AU$81m. The company is still in the early stages of the commercialisation of software to assist in the diagnosis of respiratory diseases via a mobile smartphone application. The jump in share price is due to the request made to the United States Food and Drug Administration (FDA) for the FDA’s approval of the application.
Eden Energy Limited (EDE) - posted a 37% increase in market capitalisation, up from AU$51m to AU$70m.The company’s share price climbed following the announcement that Eden’s wholly-owned Australian subsidiary, Adamo Energy Ltd, had agreed to sell its investments in UK petroleum and exploration development licences to UK Onshore Gas Limited. This will occur via the sale of all the issued share capital in Adamo (UK) Ltd and is subject to shareholder approval.
Western Australian top performers over the past month by growth in market capitalisation
Low prices and distressed mines: Brave decisions needed to survive
Our recent global mining report, Tracking the Trends 2016, looks at the latest trends, trouble spots and travails that should focus the minds of miners – here in Australia, as well as around the world over the next 12 months.
We also present strategies they can employ to adapt to changing industry dynamics, across the likes of China’s economic transition, the need to focus on areas such as operational excellence, innovation and safety and security.
One key trend is the need to adjust to the ‘new normal’ when it comes to commodity prices and demand. Demand might be down, but global production isn’t necessarily falling.
Producing at a loss is not generally a good place to be for anyone. But for companies with a strong balance sheet, it’s a simple enough strategy to continue producing at the lowest possible cost and see out the bad times. In fact, some miners are expanding production to lower unit costs through economies of scale to claw back margin. An added luxury for those fortunate enough to be in this position is that they may even be able to use the opportunity to add to their portfolio.
For others, however, the ongoing low price environment has forced a retreat into survival mode.
In a low price environment (and with no real sign of recovery in sight), first reactions are generally to focus on cost and operational optimisation. This is an effective response to price pressure and preserves margin. It also happens to be the option that mining executives feel most comfortable with as it generally fits their own area of expertise and is something they can control.
However, every mine has a level below which it simply can’t produce and, at current price levels, the number of mines producing at a loss is significant across most commodities.
Mining companies that find themselves low on cash and high on debt, however, face an altogether different picture.
A strategy of just hoping for a recovery can be fatal as management teams lose control and creditors and other stakeholders start to drive the agenda. This is already playing out, with increased company debt restructurings and corporate collapses.
So, once cost reduction options have run out, what’s left to ensure miners preserve value for their stakeholders? Waking up to the reality of a ‘lower for longer’ environment, or even a lower prices as a ’new normal’ is a very good start.
Thinking long term and being prepared to make brave decisions are the next steps, and management teams, under the oversight of smart-thinking boards, have to gain a granular understanding of key areas that drive decision-making in a distressed environment.
Areas that need the highest levels of knowledge and understanding include:
- The real value of the mineral assets
The current sustained low price and outlook is resulting in an increase in impairments to asset values. Impairments carry the risk that balance sheet covenant breaches may be triggered where debt exists. Understanding the potential impact of this and early engagement with debt providers is critical
- The rights, motivations and interests of debt providers
Power can shift quickly, and knowing how to appropriately engage and communicate with this potentially diverse group of stakeholders is important
- What operating cash flows look like at current and an appropriate range of forecast prices, not the prices we all hope for
The current volatility has challenged established norms about how future prices might move and management teams need to consider a range of potential scenarios
- The skill set within the team. Be honest about the level of expertise and get help from experts where a skills gap exists
Your people have got you this far, and done a great job operating during good times. But are they equipped to manage during the lean times and with the competing needs of different stakeholders. An independent view can give confidence to you and your stakeholders and provide additional resource support to your team
- The implications of putting operations on care and maintenance. Do this while management can still control the process
Care and maintenance is certainly a consideration, but miners need to carefully examine the pros and the cons. Putting an operation on hold comes with its own costs, supply chain impacts and the need to consider the risks and costs to ramping up production when operating conditions improve
- How the situation is impacting staff. Communicate openly with them
The people equation remains important. Employees remain a key stakeholder group who can make or break challenging times. Remember this is likely to be more a marathon than a sprint
- The supplier profile, risks and their expectations. Get their support early
Suppliers and contractors will become creditors should an insolvency appointment become necessary and, for some, their success or failure, will be directly linked to yours. Understand their individual positions, and seek their support as valued partners, even to the extent of converting their support in the lean times into equity when better times return
- Short-term cash flow needs. Plan weekly cash flow, daily is even better
It goes without saying that taking a granular approach to managing cash when revenues are weak is critical
- How the regulatory environment can provide protection to distressed businesses in the relevant mining jurisdiction
Regulatory and/or tax relief can certainly help, with some jurisdictions open to, for example, a suspension of royalties.
Once distress hits, things can go downhill fast, and management teams need to adapt quickly and be unstintingly proactive in engaging with these issues in order to stay in control of the situation.
This requires clear vision on what the options are, and decisive action to pursue the route that preserves the most value and ensures the best outcomes for all stakeholders.