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Mining hits the growth cliff

Mining hits the growth cliff

On Wednesday the Australian Bureau of Resources and Energy Economics said 51 mineral projects, 18 gas and petroleum projects and 18 infrastructure projects worth $268 billion had been approved. Of the 87 projects, 11 mega projects worth more than $5 billion each, account for an aggregate $200 billion or 75 per cent of the total committed project value. For some months now we have been warning investors of a growth cliff and note the slowing in the number of projects that have progressed from potential to committed. For example, in the six months to April 2012, 21 projects worth $45 billion were approved. However, in the six months to October 2012, 10 projects worth $13 billion were approved.

The Annual General Meeting of NRW Holdings Limited (NWH), a major Australian resource service company, was also held on Wednesday. One slide in the presentation by CEO Julian Pemberton showed the NRW order book had declined from $2.0 billion to $1.6 billion in the four months to 31 October 2012. This compares with NRW’s fiscal 2012 revenue of $1.35 billion. A number of stock brokers responded by cutting their Net Profit forecast by over 20% to around $85m or 30cps. NRW’s share price decline has been extraordinary, from over $4.00 six months ago to the current $1.35.

We understand NRW is being touted as a “value investment”, possibly selling on a prospective PE of 4.5X and assuming it maintains its payout ratio of 50%, a dividend yield of 11%. Nevertheless we remain sympathetic with the growth cliff argument, particularly given the “second wave” of Australia’s LNG projects are now at serious risk.

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This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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4 Comments

  1. Gurkamal Kanwar
    :

    It will be interesting to see the various stats before the mining boom stated in Australia. Australia was going well before the mining boom (we weren’t in recession) and I guess Australia will continue to do well after the boom and won’t go into recession (if recession is what we are worried about). I keep hearing Australia hasn’t had a recession for over 20 years. No doubt, the drop in Australian dollar will help Australia’s retail and manufacturing sector. Which is stubbornly high at the moment. Surely the decline in demand for Australian resources and lower cash rate will eventually have an impact on the Australian dollar.

  2. No argument from me, though FGE today forecast another considerable rise in profit for 2013. Still, I think we’re a lot closer to the end than the beginning.

  3. Couldnt agree more. There is no “Moat” around digging dirt. NRW could be a short term play ( 6 months) because the iron ore price has firmed above $115, FMG will be announcing that kings mine is back on and Gina Rhinehart will soon announce she has finance for Roy Hill. And the committed gas play’s construction budgets are scarily blowing out ( chevron soon to announce Gorgan buget cost is out at $60 billion, from $43 billion) but that is the problem with commitment , they can’t stop now. So yes, dirt digging will slow considerably. And the problem with excavators, they only dig dirt. Which is great when there is plenty to move.
    A side note ; someone asked me the other day, what will happen to all the workers when these massive projects have been built, I said, ” they’ll go home to Ireland”

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