03/02/2011 - 00:00

Rising costs lurk behind big miners’ profits

03/02/2011 - 00:00

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Despite the strong profits miners are expected to announce this month, rising costs and tax imposts are major concerns.

HUGE numbers will capture the headlines and egg-on the pro-tax crowd when the world’s mega miners start filing profit reports next week, but buried in the billions will be a nasty little cancer called costs, which threaten to whack all mine profits next year.

First cab off the reporting rank is expected to be Xstrata when it files its annual results in London on Tuesday (February 8). And while Xstrata owns important coal and copper assets in Australia, the real game for the locals starts on Thursday February 10 when Rio Tinto files.

Estimates of Rio’s result vary but the consensus is that the company, which suffered a near-death experience in 2008, will please shareholders with a 150 per cent hike in net profit to about $14 billion – give or take half-a-billion dollars.

For a business which came close to choking on its ill-timed $40 billion acquisition of Canada’s Alcan aluminium business, next week’s result for the year ended December 31 will be trumpeted as proof that Rio has survived, and prospered.

The annual dividend for shareholders is expected to crack the $1 a share barrier, more than double last year, and a guaranteed red flag for the Australian government, which will use the profit and payout as proof that the miners can pay more tax.

Adding to the ‘more tax’ chants will be the results of South African-based Anglo American, which has some assets in Australia, and reports on the same day as Rio.

BHP Billiton will round off the local mega-miner reporting season when it files a half-year result on February 16, with $10 billion a good starting number for the six months to December 31, a precursor to an expected full-year (to June 30) result of around $20.7 billion.

Those numbers will make for gee-whiz headlines and provide useful ammunition for the pro-tax lobby. So to help with their banner writing, here’s a thought; in the current boom market for iron ore, coal and copper, BHP Billiton is posting a daily profit of around $55.7 million, or $2.36 million an hour, or $39,383 a minute – or $656 a second if you want to be really silly.

Picture clear? Huge mining profits at a time when the Australian government is annoying people with a petty tax grab in the name of helping flood victims will shove the mining super-tax back to the political centre-stage.

Perhaps that’s a reason why the flood levy has been set as low as it looks, enough to annoy but do no real harm, but sufficient to set off a fresh round of bash the miners.

Interesting as that political/business game will be, serious investors will be looking below the headline numbers for a clue to the cost question, and whether the benefits of the boom are being eroded by an outbreak of inflation, just as happened in the boom Mark I.

Back in 2007 and ’08 the mining industry was clubbed by soaring costs for every imaginable input – from labour wage rates, to sky-high prices for consumables. The lasting memory from that phase of the boom was a global shortage of the big tyres used on Haulpaks and other in-mine equipment.

Reports from mining equipment suppliers indicate that 2011 is looking awfully like 2007 with rubber tyres again leading the consumables cost-inflation outbreak, which has already been reported in capital cost explosions at iron ore and oil and gas projects.

All this points to tricky times ahead for resource stock investors. Commodity prices might be high, and will be reflected in next week’s profit reports, but costs are probably now rising faster than revenue, and there’s man with a ‘tax club’ hiding behind the next corner.

Steel to go up

IRONICALLY, a beautiful word in this context, the material likely to cause Australia’s iron ore industry the most pain during its current burst of expansion, is steel.

Forecasts for steel price rises during 2011 average 30 per cent, with some European forecasters expecting steel to soar by up to 60 per cent – thanks almost entirely to Australian and Brazilian iron ore exporters winning huge price rises.

Bursts of higher prices invariably accompany periods of rapid economic growth, with the next few years expected to be a repeat of the past as Asia’s economic giants, China and India, steam ahead, and the US joins the game. Only Europe will be sitting on the sidelines, though its expected 1 per cent growth rate means it will be a steady-state consumer of commodities.

For investors, the outlook for steel is a warning shot that when de-coded reads inflation.

No-one is yet talking too loudly about an outbreak of global inflation, but what’s happening with steel – a fundamental building block of every economy – should be seen as a sign of things to come.

A second sign has been the remarkable rise in the inflation rate in Britain, a country still stuck in recession, but now also heading towards an annual 5 per cent inflation rate – bringing back memories of an appalling economic event called ‘stagflation’.

More importantly than the steel-price skyrocket, British stagflation is a signal that now is a good time to get your investment portfolio into inflation-fighting shape with thought given to products such as inflation-linked deposits available through some banks.

Banks buy gold

GOLD, a favourite of Western Australian investors, has also been in for its fair share of hammering on international markets in the belief that recovery in the US equals a bad time for gold given its status as a competitor to the US dollar.

Offsetting the bad news for gold was a report from Moscow that the Russian central bank plans to buy 100 tonnes of gold from domestic banks to replenish the country’s reserves.

If, as seems likely, other central banks use the recent fall in the gold price to mimic Russia, we could soon be watching a remarkable transfer of gold ownership with private investors selling and central banks buying – a classic example of short-term versus long-term thinking.

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“I don’t want to do business with those who don’t make a profit, because they can’t give the best service.”

Lee Bristol

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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