27/08/2008 - 22:00

Base metals turbulence should ease

27/08/2008 - 22:00

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The past year has provided a bumpy ride for players in the base metals field, as sharp falls in commodity prices, a stronger Australian dollar and rising cost pressures bite into the bottom line.

Base metals turbulence should ease

The past year has provided a bumpy ride for players in the base metals field, as sharp falls in commodity prices, a stronger Australian dollar and rising cost pressures bite into the bottom line.

It was only about a year ago that companies exposed to base metals such as copper, zinc, lead and nickel were riding high on the resource boom, reporting record profits and feeling upbeat about future prospects.

But the fall-out from the sub-prime crisis in the US, combined with the Olympics and weaker commodity prices, among other factors, have created the "perfect storm" according to Fat Prophets analyst Gavin Wendt.

"It wasn't a great reporting season but I guess the market has been pretty spoilt in that we've seen over the past five to six years - continued increases in prices and profitability delivered by most companies," Mr Wendt told WA Business News.

He added that companies doing it tough at the moment were those that specialised in either zinc or lead, and to a lesser extent nickel, all of which had experienced sharp falls in prices during the past six months.

A recent example is Perth-based Perilya Ltd, which will axe 440 jobs and halve ore production at its Broken Hill zinc-lead operation in South Australia.

The move mirrors that of former suitor CBH Resources, which also cut jobs at its Endeavour zinc-lead operation.

"The resizing at the Broken Hill Operation is prudent, conserves cash and positions the operation for the future," Perilya executive chairman Patrick O'Connor said.

Another company taking the prudent approach is nickel miner Minara Resources Ltd, which posted an 80 per cent fall in net profit for the half-year, to $49 million.

The lower result was on the back of rising input costs with sulphur up from $US100 per tonne to about $750/t, a strengthening Australian dollar and the nickel price almost halving to $US18,000/t over the period.

The lower commodity prices also affected nickel player Mincor Resources Ltd, which reported a 36 per cent fall in full-year net profit after tax of $64 million, while Kagara Ltd recorded a 28 per cent fall to $90 million.

While the results may appear gloomy, Mr Wendt said investors had already priced in an average reporting season with market sentiment already improving following the bumper results delivered by mining giants BHP Billiton and Rio Tinto.

"I'm not that gloomy with respect to the outlook; I think we've seen pretty close to the bottom, if not the bottom as far as base metals are concerned and my justification for that is that the inventory situation is still tight," Mr Wendt said.

He expects the sector to ramp up in September and October as the summer holiday period in the Northern Hemisphere draws to an end.

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