Energy / Resources

  • The Resource Service Companies are Contractors

    David Buckland
    November 14, 2012

    The contractual nature of the resource service sector was highlighted with Emeco’s latest earnings downgrade. Their Australian fleet utilisation has declined from 91% in the 6 months to June 2012 to the current 66%. A combination of weaker demand, contract revisions, and contract non-remewals was to blame. Commentary particularly reflected lost contracts from the iron ore and coal industries. Expectations for the Company’s revenue line has been cut by 20% to around $550m for each of Fiscal 2013 and 2014, while net earnings have been reduced by around one-third to $51m and $58m, respectively. At the current share price of $0.51, some brokers are calling Emeco a buy as it is now selling on a prospective PE of 6X and a one-third discount to its net tangible asset backing of $0.76 per share.

    Nevertheless, we remain cautious on the outlook for the resource service companies generally and believe investors should be wary of Emeco’s forecast $443m net indebtedness.

    by David Buckland Posted in Companies, Energy / Resources, Insightful Insights.

  • MEDIA

    The Lay of the Land

    Roger Montgomery
    November 13, 2012

    Roger provides his latest insights into the current state of the Australian share market (and a lack of value therein), the impact of changes in the mining industry on the Australian dollar and future foreign investment, and the outlook in the United States and its “Fiscal Cliff” with Ross Greenwood on Radio 2GB.  Listen here.

    This program was broadcast 13 November 2012.

    by Roger Montgomery Posted in Energy / Resources, Insightful Insights, Radio.

  • Global mining capital expenditure peaking in 2012?

    David Buckland
    November 9, 2012

    World Steel Production, according to Macquarie Equities, has been cut by 4 per cent to an average 1.7 billion tonnes per annum over the 2013-2015 period.

    China’s steel production accounts for an average 760 million tonnes or 47%, approximately 50 million tonnes more than their forecast average demand.

    Global mining capital expenditure is expected to peak in 2012 at $142b and decline by around 10% per annum to $115b by 2014.

    Earnings downgrades are being experienced by major excavator companies like the Japanese listed Komatsu, where mining equipment makes up 30% of its US$22b revenue line.

    by David Buckland Posted in Energy / Resources, Insightful Insights.

  • Where is the ‘Fat Controller’?

    Roger Montgomery
    October 18, 2012

    Yesterday Marius Kloppers was reported in the Oz as saying “the record prices we experienced over the past decade, driven by the ‘demand shock’, will not be there to support returns over the next 10 years”

    Additionally he revealed that the mining industry collectively has not learned anything from past booms and busts when he explained that to meet the rising demand mining companies had yet again taken a “volume over cost” approach, adding “improving productivity played second fiddle to speed to market for many in the industry”.

    While we can give ourselves a little ‘we-said-it-here-first’ pat on the back for spotting the coming slump in iron ore prices a year ago and protecting our investors from it, the bigger picture is more important;  Where is the industry’s equivalent of the Thomas the Tank character – the Fat Controller?  Why is there no ‘OPEC’ for iron ore and coal producers?  Would it help if there was?

    The lessons of each boom/bust cycle are lost with each generation’s death and the mistakes repeated again. Only those who study history can hope to beat this cycle because caught in its spotlight are prone to declare this time is different.

    An argument we heard this time was “it can’t fall below $100/t because China’s cost of production is higher”. Yet anyone with more than a few minutes experience in commodity markets can tell you that just about every commodity has traded below its cost of production and sometimes for many years.

    While we believe we are able to spot these cycles developing, we must ask the question, what will be put in place to ensure that next time billions are again not wasted?  Or is this the ugly wart on capitalism’s nose that cannot be removed?

    by Roger Montgomery Posted in Energy / Resources, Insightful Insights.

  • Is there a ‘floor’ under the gold price?

    Tim Kelley
    October 11, 2012

    Since 2001, the gold price has risen from below $270/oz to almost $1800/oz – a compound growth rate of around 17% p.a. which has made it one of the most rewarding assets to hold over that period. The majority of commentators now seem to be born-again gold bulls, with ever increasing long-term price targets being put forward, justified by gold’s status as an alternative currency in a time of economic uncertainty and unlimited quantitative easing.

    While we can’t see a reason for gold’s run of strength to end in the short term, we are mindful of the long-term downside risks that attach to such a strong rise in price for an asset that does not produce income. Following a spectacular run between 1970 and 1980, it is worth noting that gold lost over 80% of its value in real terms during the following 20 years.

    by Tim Kelley Posted in Energy / Resources, Insightful Insights.

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  • Iraq’s news is not all bad

    David Buckland
    October 11, 2012

    According to the International Energy Agency (IEA), Iraq’s oil exports for the month of September 2012 hit 2.6m barrels of oil per day, the highest level in more than thirty years.

    The IEA expects Iraq to more than double its oil exports by 2020 to 6m barrels of oil per day.  At the current price that is export revenue of US$200 billion per annum.

    Iraq’s official target is for exports of 12 million barrels of oil per day.  Comments from the contracted producers, Royal Dutch Shell, BP, Exxon Mobil, Lukoil and CNPC from China, in terms of the potential doubling or quadrupling of Iraq’s oil exports over this decade will be worth following.

    by David Buckland Posted in Energy / Resources, Insightful Insights.

  • MEDIA

    Cash in on the Gold Dream

    Roger Montgomery
    October 1, 2012

    Roger provides his insights on gold miner Codan’s shiny prospects in his October 2012 Money Magazine article.  Read here.

    by Roger Montgomery Posted in Energy / Resources, Intrinsic Value, On the Internet.

  • Materials prices to collapse further

    Roger Montgomery
    September 30, 2012

    If you think the declines so far in iron ore are significant, you ain’t seen nothing yet.

    I think the declines we have seen in commodity prices still have a long way to go.

    We’ve long argued that a classic supply response would follow the massive investment in exploration and production that itself followed a surge in demand from China that caused prices to reach historic highs.

    But China’s demand – itself was based on unsustainable growth in fixed investment spending – is now fading. China represents less than 11% of the global economy, but it commanded 30% to 40% of total global demand for copper and 60% of total global demand for cement and iron ore thanks to the massive social modification projects that required bridges, roads, ports, cities, subways and skyscrapers.

    This is not sustainable and so demand for the raw ingredients will decline. Additionally, the nature of future growth will change and more consumer driven growth will again demand less materials.

    continue…

    by Roger Montgomery Posted in Energy / Resources, Insightful Insights, Value.able.

  • Steel production confirms slowing industrial output

    David Buckland
    September 26, 2012

    Data released yesterday from “worldsteel” on global iron and steel production confirmed slowing output. Global steel production for August 2012 was down 1% year on year. Steel production from the European Union for August was down 15% year on year, taking annual output to 144 million tonnes, or 9.6% of the 1.5 billion tonnes per annum of global production. Chinese steel production has slipped in recent months from an annualised 750 million tonnes to 700 million tonnes, or 47% of global production.
    For 2013, Australia’s Bureau of Resources and Energy have recently cut their iron-ore forecast to US$101/ tonne, while many brokers are still assuming a price of at least US130/tonne. We continue to watch the steel numbers closely.

    by David Buckland Posted in Energy / Resources, Insightful Insights, Manufacturing.

  • It’s a Bear Trap! Be fearful when others are greedy

    Roger Montgomery
    September 17, 2012

    Its no news we have been warning investors about the risk of declining iron ore prices since late calendar 2011. Most recently we have been warning of a bear trap – the risk associated with buying stocks when they appear to be ‘cheap’ because they have fallen a long way but poor fundamentals are likely to see prices even lower.

    Figure 1 outlines how The Montgomery Funds have been thinking about China, Iron Ore and our big miners.

    continue…

    by Roger Montgomery Posted in Energy / Resources, Insightful Insights, Market Valuation.