The recession in resources gathers pace…
As you must well know by now, we have been suggesting investors be wary of mining and mining services companies for over a year and half. Now that the somewhat predictable recession is occurring, most of the commentary centres on the present malaise.
But we are now moving onto the next idea, which is finding some traction at Montgomery. That idea is hanging, like a fog, around a simple question: If the one sector of the economy (mining) that was keeping Australia out of a recession, falls into one, what happens next?
We will spend the next few weeks thinking about (and perhaps acting on) the idea that tumbleweed returns to the streets of Perth and the city’s influenza eventually spreads to the currently indifferent Eastern Seaboard of Australia, at precisely the same time that stocks all look expensive.
In the meantime, and in case you missed it, you can catch up on the statements mining services companies have been making below and now add Fleetwood to the mix.
“As a consequence of flat or weaker trading conditions in the group’s principal markets, profitability during the second half of the year has not met expectations … The softening resources sector, resulting in an oversupply in Karratha, has had an effect on the earnings attributable to the Searipple village … The extent of commitment to the Gladstone village is the subject of continuing review, having regard to fluctuating market conditions and a reassessment of major projects in the region.” – Fleetwood (ASX:FWD) Announcement
For those who missed it, we wrote last week about a few more declarations here and we repeat their statements below:
“Ongoing uncertainty and volatility in commodity markets have driven a continued slowdown of capital investment in the resources and infrastructure sectors with further delays of major projects impacting revenues in the Engineering business. Additionally, the cost management programs of the major miners have led to scope reductions and cancellations across UGL’s operations and maintenance business.” – UGL Managing Director and CEO, Richard Leupen – market update
“Market volatility and weak conditions in the Australian resources sector continue to provide a challenging trading environment. While recent conditional environmental approvals for key projects were positive signs, continuing delays in final environmental and investment approval has resulted in further project slippage with flow-on impacts on anticipated revenues in the second half of FY13.” Sedgman – market update
“Just pulling more tonnes out of the ground is not enough. The mining sector has experienced significant cost increases in recent years, and it continues to do so. In addition, stakeholder expectations of the industry have also grown … We are targeting cumulative cost savings of US$5 billion over the next two years. This will be achieved through a relentless focus on cost reduction and productivity improvement across all areas of our business.” – Sam Walsh, Chief Executive, Rio Tinto – AGM
“We must challenge ourselves to increase returns from new investment, in the same way that we need to squeeze returns from our installed instrastructure. IN this regard, capital and exploration expenditure for the 2014 financial year will decline significantly, to approximately US$18 billion, and the rate of spend is expected to decline substantially thereafter. By reducing our annual spend and increasing internal competition for capital, we expect to maximise returns from incremental investment…” – Andrew Mackenzie, Chief Executive Officer, BHP Billiton – 2013 Global Metals, Mining and Steel Conference
“Ausdrill’s core business comprising of mining services in Africa and Australia has largely continued to perform as expected due to the focus on production related services. However, the Group’s profits are expected to be impacted by the general slowdown in activity in the Australian mining sector that has occurred from September 2012 onwards, and which has not recovered as previously expected.” – Ausdrill Limited – market update
Nikki Williams, CEO of the Australian Coal Association, said on SBS in January that the Australian coal sector is at “a terrible junction where not only has the international market come off in terms of prices, but our costs and productivity have gone to a terrible place,” … (Until recently Australia was the cheapest place in the world to produce coal) … “And in just five years, we’re now the highest cost producer in the world at $176 a tonne compared to the rest of the world at $106.”
The head of engineering firm, Coffey International, has warned of a protracted economic downturn far wider than the slowdown in the mining sector, with an ‘increasing cascade’ of project delays and cancellations and little chance of a recovery for some time. “What we have been seeing is significant project delays or cancellations that were broader than simply mining,” Coffey managing director John Douglas told The Australian.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
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.
josh.ng.perth
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URBANISATION
What John Lee wrote today joined a few dots regarding my understanding of the resources boom, Chinese urbanisation, Chinese ghost cities and my understanding of an aspect of China which Aussies may not comprehend – which is that even though Chinese people can move freely around their country these days, the rural people are still not able to migrate permanently to the cities due to past communist policies.
The idea that the iron ore boom is due to the Chinese urbanisation is a myth.
UNSUSTAINABLE GROWTH
Then, John looked at domestic consumption (1980-1989) as a result of land reform, export manufacturing (1992-GFC) and fixed investment (post-GFC to current) as drivers of growth.
I quote him, “Whereas fixed investment contributed around 20-25 per cent of GDP growth in the 1990s, fixed investment was responsible for around 55 per cent of GDP growth by 2007. In 2009, fixed investment drove around 90 per cent of GDP growth.”
“The construction of high-end residential property bore little relationship to actual residential demand, meaning the price of them bore next to no relation with yield. The sector was driven by over 10,000 ‘Special Investment Vehicles’ established by local governments to take advantage of the free money offered to them. From 2008 onwards, many local government authorities became reliant on income from property construction and sales to balance their fiscal books – as local government entities cannot directly issue bonds or raise new taxes.”
I can conclude that what is happening in China is unsustainable and we should not depend on China for the “next boom” or “next economic bubble” to help us get through. The quicker we shake ourselves off the “in denial” mode, the better it is for us. That is what my 2-cent thoughts are telling me.
Reference: bizspectator
Hayden Bunyan
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Dear Roger,
I’m 23 years of age, green and have not finished grinding my knuckles as you may have already done but a have a question for you and what I lack in experience I make up for in enthusiasm.
I agree with all your commentary on the mining services sector and how since capex spending from the major miners has decreased thus having a large effect on the share prices of those businesses in the mining services sector. However, in your many years of experience you have, for every share in MND, CDD and UGL etc. that someone sells someone must be buying these shares and why. With all the information you report and facts is it just these people are averaging there cost down or do you believe that capex will start at some stage unknown in the future and these sound businesses will survive and be able to capitalise on that capex in the future?
Your wisdom is much appreciated when you have some free time.
Many thanks,
Hayden Bunyan
Roger Montgomery
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I think one explanation is that two people can look at exactly the same facts and come to completely different conclusions. ANother is that they both have come to the same conclusion but have completely different time frames. A third explanation is that one is right and the other is wrong. Hope that helps.
Matthew Ball
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Hi Roger,
What are your thoughts on BHP? are there iron ore assets as low cost as they say, or will even they have to down scale in the face of declining demand
Roger Montgomery
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We have no reasons to believe anything else from the company but we don’t have sufficient clarity about their prospects to warrant interest.
Scott Milson
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Re: Decmil: Skaffold’s top 5 stocks for 2013 presented by Jeremy Wilson and Roger Montgomery Feb 20th 2013. For the second consecutive year the team at Money Magazine asked Skaffold to name 5 stocks that stood out for superior quality, forecast yield, future growth and the value for money they offered investors. Decmil (mining services), Clough (mining services), Mastermyne (mining services), CWP and FLT.
Roger Montgomery
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Hi Scott and you might also remember my comments about uncertainty over their outlook. I can find fifty references to warnings about mining and mining services that we have made. Take a look at the Quality Score Evaluate Screen in Skaffold for every company. You will notice that over ten years, these scores can change. Will they change in the future? You bet they will. Could they deteriorate if companies start struggling? Yes. Do we think they might start struggling at some future time? Yes. COuld we be wrong? ABsolutely!
In April last year we sold our holdings in mining services and have been warning investors about mining’s fiscal cliff since then. We look prescient right this second but we could be wrong very quickly. “Skaffold’s top five” are those companies that Skaffold throws up as meeting the selected criteria for further research at that time. You can choose to research them but having discovered that their outlooks aren’t sufficiently to certain for us to invest meaningfully into, we didn’t.
The Montgomery Fund did own Decmil because all of the processes suggested the fund should despite our qualitative misgivings. All of our research suggests we should follow the aggregated quantitative suggestions thrown up by The Montgomery Fund’s process. Once the announcement about Browse being put on hold was announced, it was sold out of The Montgomery Fund. DCG has not been held in The Montgomery Private Fund since April 2012.
Steve Smara
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Resource sector has slowed dramatically, the boom has slowed, but I am of the opinion quality resource companies, will survive…..I guess there was too much optimism by CEO’s planing rediculous CAPEX spend in Resource and Gas/oil, of which I read today $140b has been scrapped…..I held TSE and lost heeps!, but the train crash will take more casualties but amongst the rubble, consolidation and the stronger wil live to fight another day…..but what if China picks up in the 2nd Half of year……some of these in the beaten sector could present opportunities.
Steve Smara
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NST .66 and UXC .97 are these stocks a reasonable buy at these levels or wait further……I hold UXC
garry howlett
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I have heard the warnings for some time now!! I wonder how many were listening?? Saved me a few years Skaffold membership..Thankyou.
Roger can you explain why it would be in China’s interest to talk up there economy in the data they release to the market?? As one of the biggest importers of commodities, I would have thought that cheaper prices would be of benefit to them. Fudging the figures to give a more bullish picture only puts upward pressure on the price of commodities..
What am I missing??
Roger Montgomery
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Interesting. The economy is a many varied thing and there are benefits elsewhere perhaps.
pj2105
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Do you think the worst of the mining bust has past?
Roger Montgomery
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Maybe. Maybe not. Cannot pretend to be able to forecast that accurately.
Scott Milson
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Hi Roger,
What is your take on the impact to Decmil?
This was one of the stocks you were picking at the start of the year. Do you still believe it is a good investment? Thank you
Roger Montgomery
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We sold Decmil in April 2012.
Darren Guiver
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Hi Roger,
In your eureka report on Dec 19 2012 “Why you should ignore the market” you had a table (Figure 1) which had the Top completed holdings for the Montgomery fund which had Decmil listed ?? Does that mean that the table shown was from before April 2012 ?. I noticed that the same table was part of your star stocks piece in the ASX December 2012 newsletter.
I’m a bit confused now.
Roger Montgomery
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Hi Darren, We have two funds.