Asked why he robbed banks, the famous American robber, Willie Sutton (1901-1980), allegedly replied: “Because that’s where the money is”.
With the same logic, many mining-service companies are increasingly looking for opportunities offered by operating mines.
Why? Because, with falling prices, project activity is weak, while operating mines will still spend money on maintenance, shutdowns, equipment and consumables.
Where are the opportunities?
As a sector, gold is doing well, assisted in the past two-three years by cost cutting, a weaker Australian dollar and a relatively modest fall in the gold price.
Newmont plans considerable work at two mines: Boddington (WA) and Tanami (Northern Territory). Mid-tier gold miners such as Regis Resources, Evolution Mining, Saracen Mineral Holdings, Northern Star Resources and Ramelius Resources are enjoying good cash flows and undertaking expansions, new developments and/or acquisitions.
The outlook for bauxite (the raw material for aluminium) is also good. While aluminium prices are weak, aluminium production by China and others is expected to increase this year, thus stimulating demand for bauxite.
In 2014, Indonesia banned the export of unprocessed ore (including bauxite); Malaysia stepped into the breach in 2015, with a substantial jump in bauxite exports, but last month the government imposed a three-month ban on bauxite mining for environmental reasons. These developments augur well for Australia, the world’s largest bauxite producer.
In other sectors, some mines are doing reasonably well while others are not.
For example, iron-ore producers surviving the price rout of the past two years (notably Rio Tinto and BHP Billiton) are expected to increase production in 2016.
Prices for thermal coal (used for electricity generation) have fallen by over 60% since 2011. The Queensland Resources Council reports that (reflecting this fall) about half of the state’s thermal-coal mines are not making a profit. This is bad news – but it does mean that the other half are profitable or at least breaking even.
In this context, Asian demand for thermal coal is expected to increase steadily over coming years. Some thermal-coal mines in Australia will see increased demand for their product as a result.
While many nickel mines are cutting expenditure to the bone, Western Areas reports that its Forrestania mine is cash-flow positive and that it will spend around $20 million in the first half of 2016 on capital items and exploration.
In short, notwithstanding the downturn, operating mines in Australia will offer opportunities this year to mining-service companies.
