Kumba, Amplats expect significant decline in earnings
FIFI PETERS: Let’s dig into the mining sector right now. We had interesting reports actually coming out of the mining sector today. Anglo American and [the Anglo] crew coming out with their second-quarter production updates. By ‘crew’ I mean the likes of Kumba and Anglo Platinum.
In the main, it looks like production across quite a number of the minerals being mined by these mining companies – from copper to iron ore and [those used in the making of] steel, as well as platinum – production was lower and hit by quite a number of factors, from maintenance that had to be done and things that were beyond the control of these companies, to weather-related events and some lingering impacts from the pandemic.
To discuss the production reports and what this means for the rest of the mining sector, I’m joined by Peter Major, director of mining at Modern Corporate Solutions. Peter, what did you make of what the Anglo crew, the Anglo stable, had to say? And to what degree can [those views] be used or measured as an indicator of what is happening in the broader mining sector?
PETER MAJOR: They’re always a good indicator, Fifi, because they are just about as broadly spread geographically and minerals-wise as their competition. In fact, they’ve got a better spread. So it should balance out deficiencies in one area or another. They are still very South African-based. I think almost 50% of their production, their profits, still come from South Africa. So things in this country do have a bigger effect on them than, say, Billiton, Rio and Glencore.
The negatives we saw [were] where iron ore production was affected – both in Minas-Rio, which is in Brazil, but in South Africa as well. That was for different reasons. We couldn’t blame Transnet, for once. They said there was truck availability, they said there were some safety stoppages. I think there was a great stripping problem. It wasn’t really big, but if you get two quarters in a row where everything goes well, it’s almost inevitable. You’re going to get one quarter where a couple of things go wrong.
In mining, and probably any other business, you’re never going to have everything going right your way all the time.
And on the coal side – that was mainly in Australia – they said again rains had some effect. They had one mine closing down and they weren’t able to get the [inaudible] going in the other mine in time. So I think that was down about 10%.
What’s really helped the company is that the coal prices continue to stay high, but we’ve seen the iron ore prices falling hard now. We’ve seen PGM [platinum group metals] prices coming off. And so Amplats had some great production results – the last two quarters on Amplats. They said now we’re getting down to more normalised levels. That’s a drop from what they were the previous quarter. So people say, oh, gee, you’ve dropped. But it was unsustainably high – what they had the previous quarter.
It was a bit of a mixed bag, but there’s a negative tone out there because commodity prices on the whole are coming off hard now. If you have any grits in production you get lower prices for your commodity, and Anglo received lower prices than a lot of the people had forecast on their iron ore side; both at Kumba and in Brazil they got lower prices than the market thought they were going to get.
So it’s kind of a one-two-three-four punch, and a little lower production. The market price was lower and the price you got compared to the market was lower. I think their next quarter won’t have to do too much to be better.
FIFI PETERS: So that suggests that you think that this quarter is kind of a once-off, just the fact that production across most of the basket was lower and prices were significantly lower. I want to home in on that, because prices did come down. So what are you saying? Are you saying that some of those commodity prices have come down enough and we could see a turn in the third quarter? If that’s what you’re saying then I’m really worried about inflation.
PETER MAJOR: Look, I’m worried because these prices were sky high. These commodity prices were phenomenally high.
If we pick a couple, just like iron ore, the iron ore producers have been receiving $140, $150/tonne, when the long-term price of iron ore, going back a hundred years, is maybe $70/tonne. Most of these commodity prices do revert to the mean, almost all of them revert to the mean; that’s why they call mining a cyclical business, commodities a cyclical business.
We’ve been very used to the iron ore producers receiving $140/tonne, $170/tonne. Sometimes they were getting $200/tonne these last few years. Now it’s come from $150/tonne down to $105/tonne in less than three months. So we’re going to see more lower revenue next quarter if the prices just stay where they are today, Fifi.
FIFI PETERS: All right. And profits? It sounds like you’re not worried either, then?
PETER MAJOR: Well, if the commodity prices stay where they are today, profit’s going to come down again. Even if they get their production up now, profit might not come down too much more if the production goes up quite a bit more. But we’re still on a thin edge here.
The market does look ahead, over 12 months ahead. So the market has probably hit these shares quite hard, based on today’s commodity price. So the market seems to be thinking these commodity prices are either going to stay here or go even lower, because to look at Anglo on a 5.5 PE [price-earnings ratio], look at Amplats on a 5 PE or a 4 PE, you know, Kumba Iron Ore 3.5/4 PE, these are really low price-earnings ratios.
That’s because the market is seeing them hard, in advance of what the market thinks are going to be even lower commodity prices.
So we’re not out of the woods here. I think we got another quarter before everything stabilises.
FIFI PETERS: All right, thanks much for the update, Peter. Peter Major, director of mining at Modern Corporate Solutions, was just giving us some insights into the mining sector.