OPINION: Western Australia has a new billionaire, or to be completely accurate, it has an old billionaire who has made another billion dollars over the past 12 months without anyone really noticing.
OPINION: Western Australia has a new billionaire, or to be completely accurate, it has an old billionaire who has made another billion dollars over the past 12 months without anyone really noticing.
Kerry Stokes, best known for his interests in the media industry, has added $1.1 billion to his fortune from the rising value of the WesTrac industrial equipment business owned by Seven Group Holdings, of which Mr Stokes is the major shareholder.
Good news as an extra billion dollars is for Mr Stokes, there is better news for everyone in WA from the recovery in the value of WesTrac and its Caterpillar dealership, which is a major supplier of equipment to the mining industry.
Since April last year, the share price of Seven Group has doubled, from a low of $5.03 to latest sales at $10.39. The price increase of $5.36 a share, when applied to Mr Stokes’ 207.3 million Seven Group shares, results in an increase of $1.1 billion, lifting the value of his Seven Group stake to $2.15 billion.
Driving Seven Group (and WesTrac) is a significant improvement in the health of WA mining, which is enjoying a strong recovery in commodity prices, particularly for iron ore.
Perhaps more importantly, the recovery should not be short lived, with indications that a four-year investment drought is coming to an end.
Since 2012, capital that might once have been invested in new projects, and maintenance on old projects, has been diverted into increased dividends for investors, resulting in a dramatic decline in mine development and exploration.
The swing back to investment in productive assets has caught the attention of international investors, with one of the world’s leading investment banks, Goldman Sachs, describing the change as a new mining capital investment phase.
The situation was summed up in one headline of a recent research report: ‘Bottom found, guidance up, positive for capital goods and contractors’.
Six companies have been named by Goldman Sachs in a worldwide search for potential beneficiaries of a return to capital investment in mining, with Seven Group the only Australian business on a list that includes international equipment makers Timkin and Caterpillar of the US, Weir Group in the UK and FLSmidth in Europe.
On a local level, the recovery in engineering services and resources-sector contracting can be seen in the share-prices of companies such as Monadelphous, which has doubled from $6.50 to $12.86 over the past 12 months, and NRW, which is up 370 per cent from 16 cents to 75 cents.
“Strong commodities prices have driven a rise in (mining) sector cash flow that is funneling its way down to increasing capital expenditure spend,” Goldman Sachs said.
In a way, it could be argued that an overdue seachange has started in mining, which should give the WA economy a significant boost, and save the mining industry from a scramble in future years to plug the holes left by not investing in resources replacement.
On a global basis, Goldman Sachs expects fresh capital investment in mining over the next 12 months to reach $US65 billion, with that forecast $US5 billion more than an estimate made just six months ago.
However, to put the new capex forecast into perspective, it is interesting to look back to 2012, when more than $US140 billion was invested in mining.
In other words, capital expenditure is rising but it’s still less than half the level of five years ago.
Sobering as a look back in time might be, the important message in the Goldman Sachs analysis is that the tide appears to have turned and can be seen in rising levels of exploration, re-emerging mine development plans, and the rising share prices of mine development engineers, contractors and equipment suppliers such as WesTrac/Seven.
“We believe the first phase of capex budget increase is focused on rectifying the ‘capex liability’ (or capex shortfall) that has been created in recent years,” the bank said.
“Normalisation of strip ratios (waste-to-ore movement), maintenance spend and exploration will likely consume the early share of increasing spend.
“We see this as positive for explosives, contractors and service companies.”
Investors, however, might soon be looking at mining companies in a different way because funds diverted from capex has been making its way to them in the form of generous dividends.
According to Goldman Sachs, miners are now spending almost as much on dividends as they are on capex, whereas the long-term trend has been to spend three times more on capex than dividends.
The result of funds flowing to shareholders rather than into new projects is a decline in project development options, which is unsustainable for the long-term survival of a mining business.
No-one expects a mine development boom; rather there will be a steady recovery in work at mine sites, and a step-up in exploration, which will require new equipment and repairs to existing equipment, which is exactly what WesTrac does.
