Hugh Dive, Head of Listed Securities

Welcome to Philo Capital Advisers' Blog on portfolio construction and management issues. We welcome your comments and feedback.

  • Home
    Home This is where you can find all the blog posts throughout the site.
  • Categories
    Categories Displays a list of categories from this blog.
  • Bloggers
    Bloggers Search for your favorite blogger from this site.

Tales from the Trenches - Prices are down, but volumes are up!

Posted by on in Market Commentary
  • Font size: Larger Smaller
  • Hits: 1632
  • 0 Comments
  • Subscribe to this entry
  • Print

Whilst the downward trend in commodity prices since 2010 is often interpreted as a sign the commodity boom is over, the overall increase in the volume of minerals being exported gets very little attention in the financial press. Obviously a company's revenues and profits are determined by quantity sold multiplied by price, not just by price alone. Philo Capital view that we are moving into stage three of the mining boom, which will be dominated by the high volume low cost producers. Over the last week Australian listed resource and energy companies have all reported their production results. In an environment of falling prices, the companies that are able to deliver higher volumes from their assets at lower costs will be the winners. In this piece we are going to look at the winners and laggards and the themes coming out of the production reports released over the past seven days.

Prices-are-down-but-volumes-are-up.JPG

Production Reports

Production reports provide a guide to the profits and ultimately dividends that the mining and energy company will present to their shareholders in August.  These reports indicate the operational performance of a company’s mines or oil wells, along with the average prices the company has received for their minerals or hydrocarbons.

Winners

BHP delivered a very solid production report and ended the 2014 financial year on strong note, delivering record production of iron ore, metallurgical coal and petroleum. BHP also upgraded their production guidance for 2015, indicating a stronger than expected year for iron ore. Clearly the company is achieving improved productivity out of its assets, which will serve to maintain profits and returns to shareholders in an environment of lower prices. Based on these production numbers and the resulting higher cash flows, we see that BHP will be well placed to announce capital management initiatives at their results in August.

Similarly Rio Tinto reported record iron ore shipments (+20%) in 2014 and that its Pilbara iron ore system of mines, rail and ports reached a run rate of 290 million tonnes a year, two months ahead of schedule. The company also upgraded 2014 guidance for copper, based on better than expected grades at Kennecott Utah Copper and the ramp up of the giant Oyu Tolgoi in Mongolia. As with BHP, Rio Tinto is driving higher productivity out of its iron ore assets with a large amount of this extra production being produced with minimal additional capital expense.

Shareholders in Woodside Petroleum enjoyed a range of good news after the company reported production ahead of expectations and raised full year guidance from 86-93 Million Barrels of Oil Equivalent (MBOE)  to 89-94 Million Barrels of Oil due to the strong performance from the Pluto field. We were also impressed that Woodside’s LNG prices were up +20%.  This has occurred as legacy contracts for LNG (which were signed at a discount to help develop the Pluto field) come to an end and have been repriced upward.

Santos reported mixed production that was below expectations. The company benefited from production at PNG LNG coming online earlier than expected, but also suffered from lower productivity out of their base business. The company’s US$18.5B GLNG project also looks to be facing strike action which could cause delays. 

Laggards

Unlike the large diversified miners which surprised on the upside, Fortescue Metals shipped 124 million tonnes of ore in 2014 versus guidance of 127 million tonnes. What was more concerning to the market was that the company’s ore had been sold at a 20% discount to the benchmark index. This discount is due to both the lower iron ore content in Fortescue’s ore and higher levels of impurities such as alumina (Al₂O₃) and silica (SiO₂). To put this in perspective in the first six months BHP received an average of US$96/t for their iron ore, wheras Fortescue achieved US$82/t.

Australia’s largest gold miner Newcrest has had a tough couple of years and has seen its market capitalisation shrink from $30 billion to $8 billion. Pain continued for shareholders after Newcrest announced that it would be writing down the value of its assets by A$2.5-$1.5 billion, mostly linked to its Lihir gold mine in Papua New Guinea. Unlike the large diversified miners, Newcrest has struggled to reduce costs and drive increased production out of its assets and is not expected to pay a dividend over the next few years.

Juniors doing it tough

Junior iron ore producer Atlas Iron announced that they had shipped slightly more ore that expected. Whilst normally this would be a cause for celebration amongst shareholders, based on the heavy discounts the company had to take for its ore and its high cost of production, Atlas actually lost money selling iron ore over the last 3 months! Steelmaker and iron ore miner Arrium faced the same issue in that it was forced to accept large discounts from Asian buyers for its lower grade ores after their higher grade iron ore was disrupted by weather. OzMinerals reported higher production, but managed to burn through 60% of the company’s cash balance over the last six months due to adverse working capital charges. This is concerning for a company whose main mining asset is expected to run out in 2018!

Themes

One of the key features from the past week’s report was the growth in production was being delivered ahead of schedule from the large low cost producers. This is putting downward pressure on prices, which is clearly hurting the smaller higher cost producers more than the big end of town and will discourage further investment outside the majors. Furthermore it was clear that investors have to pay attention to the quality of the product that iron ore companies are producing, rather than just look at the headline price. Those companies with lower quality product are being penalised by the buyers.

At Philo Capital we view the mining boom can be broken up into three stages. During the first stage (2004-08) prices surged making marginal projects suddenly very profitable, which boosts the share prices of small resource companies.  During the second stage 2010-2013, we saw significant capacity added in both energy and minerals, which resulted in strong profits from contracting companies benefiting from this capital expenditure. We see that we are now in the third phase of the boom, with declining prices, but accelerating volumes from completed projects. During this phase, the large low cost producers will benefit from their higher volumes and reward their shareholders, whilst the smaller higher cost miners should face a long period of financial stress.

Disclaimer

This article has been prepared by Philo Capital Advisers Pty Ltd ABN 70 119 185 974 AFSL 301808 (Philo) and contains general investment advice only. The information in this article does not take account of your objectives, financial situation or needs or those of your client. Before acting on this information readers should consider whether it is appropriate to their situation. We recommend obtaining financial, legal and taxation advice before making any financial investment decision. To the extent permitted by law, neither Philo nor any of its related entities accepts any responsibility for errors or misstatements of any nature, irrespective of how these may arise, nor will it be liable for any loss or damage suffered as a result of any reliance on the information included in this article. The information in this article is based on information obtained from sources believed to be reliable and accurate at the time of publication but we do not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. Past performance is not a reliable indicator of future performance. Any forecasts included in this article are predictive in character and may be affected by incorrect assumptions or by known or unknown risks and uncertainties. Nothing in this article shall be construed as a solicitation to make a financial investment.

Rate this blog entry:
0

Hugh Dive, Head of Listed Securities


Prior to joining Philo, Hugh was Head of Basic Materials Group Investment Research; covering the chemicals, building materials and steel sectors. In the 2011 Reuters StarMine Equity Analyst Awards, he was rated 5th overall in Australia for stock picking and first in the Diversified Industrials and Chemicals sectors. Hugh has extensive portfolio management experience gained at Investors Mutual, with a successful track record managing both small and large cap value funds. In 2009, one of the funds he helped manage, the IML Future Leaders Fund, won the AFR Smart Investor Award for the best Australian small cap fund.


Hugh started in funds management with CC&L Investment Management in Vancouver; Canada’s largest independent fund manager with C$37B under management. At CC&L he focused on asset allocation and then Canadian equity analysis. Hugh holds bachelor’s degrees in both Economics and Law from Sydney University and the University of British Columbia, Canadian Securities Course (Honours) and is a CFA charter holder.

Comments

  • No comments yet

Leave your comment

Guest Tuesday, 17 July 2018
Powered by EasyBlog for Joomla!

Privacy Statement 

Background

We may hold personal information about you, principally because you are a client of ours or give us information through this website. Personal information means information we hold about you from which your identity is either apparent or can be reasonably determined.

We respect your rights to privacy concerning your personal information which we hold. Our privacy policy is consistent with Australia's legal requirements.

Things change

If you think our records about you might be wrong or out of date - particularly your name, address, phone, email address or financial adviser - it’s important that you contact us and they will be corrected free of charge. 

Why is personal information collected?

Broadly, we use personal information you provide only for purposes consistent with the reason you provided it, or for a related purpose, for example to:

  • Subscribe to research or another service using this website;
  • Contact you regarding our services ~ you can opt out of these communications of course, just contact us;
  • Comply with legal obligations such as identifying you if you become a client; and
  • Administer your account (should you be a client).

If you do not provide us with the information which we ask for, we (or others) may not be able to provide you with some or all of the services available through us. 

How we collect

Most information is collected when you become a client of one of the financial services which we make available, often a managed discretionary account. But there may be other ways we collect personal information such as through contact with you and from this website and your advisers. We will collect personal information from you only by lawful and fair means and not in an unreasonably intrusive way.

What we collect

The kinds of personal information collected can include the following:

  • Name, gender and date of birth;
  • Contact details;
  • Bank account details;
  • Tax file number;
  • Any access and use details for this website; and
  • Other information you or others for you (for example, your financial adviser) might tell us.

Disclosure of personal information

We will not disclose personal information we hold about you unless:

  • This policy allows or with your other express or implied consent;
  • It is to joint account holders;
  • It is to companies within our group;
  • It is to those who help our business to run;
  • It is in the public interest (for example where a breach of law is committed or suspected, and we consider that disclosure against your rights to confidentiality is justified);
  • We consider that law requires disclosure, or a regulator requests (for example, to various government departments and agencies such as the Australian Taxation Office, CentreLink, the Child Support Agency, or disclosure to courts under subpoena or to ASIC or AUSTRAC if asked);
  • We consider someone relevant to you needs the information, for example your financial adviser or someone who we have no reason to doubt is acting for you; or
  • It is to administer your account.

What about security?

We are committed to ensuring that your personal information is kept secure. We have a number of physical access and technology policies and procedures in place designed to provide a robust security environment. No personal data is stored on our web site.

In those instances where we secure your personal information in transit to us and on receipt, we use the industry standard encryption software, Secured Socket Layer (SSL) 128 bit encryption. The URL in your browser will change to "HTTPS" instead of "HTTP" when this security feature is invoked. Your browser may also display a lock symbol on its bottom task bar line to indicate this secure transmission is in place. But the internet is not a secure environment and we cannot guarantee the security of information we exchange electronically.

Website use

Our internet server logs certain information which is provided by your browser:

  • The type of browser and operating system you are using;
  • Your Internet Service Provider and top level domain name (for example - .com, .gov, .au, .uk etc);
  • The address of any referring web site (for example - the previous web site you visited); and
  • Your computer's IP (Internet Protocol) address (a number which is unique to the machine through which you are connected to the internet).

We may use cookies to obtain information with regards to web site activity (such as the type of browser used, the number of pages viewed, time of the site and navigation patterns) and to help you use this site when you visit again. This information on its own does not identify an individual but it does provide us with statistics that can help us with design of the web site. You can configure your browser to accept or reject cookies. If you reject all cookies you may not be able to use some or all of our web site.

Telephone services

We may monitor or record telephone calls for training, record or security purposes. If we do so, we will tell you at the time.

Access to personal information

In most circumstances, you have the right to access any personal information we collect and hold about you. In certain circumstances, the law permits us to refuse your request to provide you with access to your personal information, such as when:

  • We reasonably believe that access would pose a serious threat to the life or health of any individual;
  • Giving access would have an unreasonable impact on the privacy of others;
  • The request is frivolous or vexatious;
  • The information relates to a commercially sensitive decision making process;
  • Access would be unlawful; or
  • Giving access may prejudice enforcement activities, a security function or commercial negotiations.

Please contact our Privacy Officer at the address below if you wish to access, update or correct your personal information, or if you have a complaint about how we have handled your details. We have a compliance process for dealing with complaints and we undertake to deal with your complaint as quickly as possible, and to keep you informed of its progress. 

Further information

You can obtain further general information about your privacy rights and privacy law from the Office of the Australian Information Commissioner by:

  • Calling their Privacy Hotline on 1300 363 992; or
  • visiting their web site at www.privacy.gov.au, or
  • by writing to:

The Australian Information Commissioner
GPO Box 5218
Sydney NSW 1042

or

The Australian Information Commissioner
enquiries @ oaic.gov.au 

Changes

We may make changes to information handling and privacy policies and practices and this privacy policy. We will publish important changes on our web site and if necessary update this policy.   

Privacy Officer

Attention: the Privacy Officer
Philo Group

Level 11

37 York Street
Sydney NSW 2000

Tel: 1300 303 323

or send a message on Contact Us page

 

Terms of use 

This website is published by Philo Capital Services Pty Ltd ABN 91 154 859 284 and is operated by Philo Capital Services Limited and other companies that are associates of Philo Capital Services Pty Ltd including Philo Capital Advisers Pty Ltd ABN 70 119 185 974 AFSL 301808  (referred to collectively as the Philo Group).

Using this website is your agreement to these terms as amended from time to time. Please take the time to read them. Contact us if you have any suggestions or complaints.

We do not promise that this website is always up to date, always available or virus or third party cookie free.

We take reasonable care in the maintenance of information on this website. However, to the extent permitted by Australian law, all obligations which might otherwise be implied or imposed on us by law or equity in relation to this website are expressly excluded to the extent permitted by law. Loss arising to you from use of this site is limited to resupply by us of the services. Under no circumstances will we be liable for any special or consequential damages.

We may amend this site or any part of its contents without telling you. You must not modify this site. Contact us if you wish to link to this site. We are not responsible for links to outside this site.

Unless otherwise expressly stated to the contrary, this website is not designed for the purpose of providing personal financial or investment advice. Information provided does not take into account your particular investment objectives, financial situation or investment needs.

You should assess whether the information on this website is appropriate to your particular investment objectives, financial situation and investment needs. We recommend you seek financial, legal and taxation advice. You should do this before making an investment decision on the basis of the information on this website.

Opinions expressed are subject to change without notice. Past performance is not a reliable indicator of future performance. Any forecasts included on this website are predictive in character and may be affected by incorrect assumptions or by known or unknown risks and uncertainties. Actual results may differ substantially from the forecasts.

Unless otherwise expressly stated to the contrary, the information on this website is not a recommendation to invest or refrain from investing in any investments, securities or financial products, including those which may be offered by any member of the Philo Group.

This website and all it displays are the property of Philo Capital Holdings Pty Ltd and related entities and are protected by copyright, trade mark and other intellectual property laws. You may reproduce information for your personal use only. We reserve all other rights.

Unless otherwise stated, all figures are in Australian dollars and include GST. Examples used on this website are not exhaustive.

This website is for persons located in, and is designed to meet only the laws of, Australia. This website is not for use by people not located in Australia. It is very likely that it does not comply with all foreign laws. In any dispute arising from this site, New South Wales laws apply. You consent to the exclusive jurisdiction of the courts of New South Wales.