Good Morning,
There's a lot around about BHP Billiton (BLT) this
morning. Although some are missing some pertinent elements including BLT's
costs. If one cannot produce and sell a product without incurring freight and
royalty costs, why are these not included in the cash costs?
BLT's $16 a tonne is wrongfully considered a pain to the
industry. The marginal producers will suffer, that's a given. BLT's total costs
are not near $16/t! Without going into details analysis, BLT and RIO's all in
cash costs are nearing $35-40/t pending on weather and energy cost movements.
The commitment to Port Hedland of additional $240M is not
to be sniffed at, this isn't included in freight or royalty costs. They have
committed to the purchase of additional tugs and a new "tug harbour"
to improve the reliability of the port.
Iron ore will be under further pressure. With most
commodities the gap between cost of production and sales price narrows over
time. The Chinese are not speculating on Iron Ore, in fact most commodities,
this has had a notable effect on commodities prices.
Although BLT is still increasing to capacity of 290Mtpa and forecast to production of 270Mtpa for 2016. Whether the production increase
improves costs (or efficiencies) any more than have already been expressed is another
matter.
Last weeks impact for Onshore US assets $2B and a net loss recorded on the
demerger of South32 (Short 32) are now realised. This will be addition to the
copper writedowns that appear to be exploration related are not to be sniffed
at.
As Rio is slowly being recognised as ex-growth, it may be
premature but all the same, BLT is looking like a cash model rather than a
growth company.
The marketing update is worth consideration as there's a
glaring significant theme, please not all comparative years and half
years.
Average realised prices(6)
|
FY14
|
H1 FY15
|
H2 FY15
|
FY15
|
FY15 vs
FY14
|
H2 FY15 vs
H2 FY14
|
H2 FY15 vs
H1 FY15
|
Oil (crude & condensate) (US$/bbl)
|
102
|
85
|
52
|
68
|
(33%)
|
(49%)
|
(39%)
|
Natural gas (US$/Mscf)
|
4.35
|
4.21
|
3.29
|
3.77
|
(13%)
|
(33%)
|
(22%)
|
US natural gas (US$/Mscf)
|
4.10
|
3.89
|
2.59
|
3.27
|
(20%)
|
(46%)
|
(33%)
|
LNG (US$/Mscf)
|
14.67
|
13.76
|
9.40
|
11.65
|
(21%)
|
(36%)
|
(32%)
|
Copper (US$/lb)(7)
|
3.22
|
2.98
|
2.61
|
2.78
|
(14%)
|
(16%)
|
(12%)
|
Iron ore (US$/wmt, FOB)
|
103
|
70
|
53
|
61
|
(41%)
|
(45%)
|
(24%)
|
Hard coking coal (US$/t)
|
131
|
110
|
99
|
105
|
(20%)
|
(18%)
|
(10%)
|
Weak coking coal (US$/t)
|
111
|
92
|
85
|
88
|
(21%)
|
(18%)
|
(8%)
|
Thermal coal (US$/t)(8)
|
74
|
61
|
56
|
58
|
(22%)
|
(21%)
|
(8%)
|
Nickel metal (US$/t)
|
15,273
|
16,905
|
13,688
|
15,301
|
0%
|
(18%)
|
(19%)
|
South32 (S32/Short32) quarterly results are today as well, with little
mention as BLT have overshadowed their results. This could be a cunning format
for hiding crap.
South 32 were notified by BHP Billiton that
non-cash, pre-tax impairments of South32 assets totalling US$1.9 billion were
recognised effective 6 May 2015. Largely offsets prior fair value uplift of
US$2.1 billion recognised for Australia Manganese and South Africa Manganese.
A couple of issues here, firstly are S32 not recognising BLT's $2.1B impairment on S32, but more so, if South32 are limiting manganese
production because the prices are so dire, then the uplift in valuation should
be reversed even more so than the impairment. Perhaps S32 accounts department need to remove their socks before
attempting the full year accounts. We'll have to wait until the interims to
find the other $200M.
With all miners rushing to capacity rather than cash
efficiency and security of supply, expect significant pressure of caps on
commodities. In the absence of some significant casualties, the market is set
for lower prices for longer. Oh and the Chinese stimulus...being a risk.
Something of significance that isn't being widely reported
yet, but has started to be unwound after the Government investigation.
Speculators would be wise to consider is the unwinding of ETF's back by
physical metals in China (Fanya
Metal Exchange). This is significant in the REE/REM (Rare Earth
Elements/Rare Earth Metals) space, but one should consider 'certain' copper
trading houses where some of the investors have had a liquidity issue.
With an increase in trade disputes on commodities exchanges,
at what point does the Chinese Government get involved in these issues. More so
with fraudulent trading companies springing up, what are the risks to the
market with alleged guaranteed returns on commodities of 50% in a day.
China had Qingdao issues with Copper financing (ghost financing), that have not
only seen a spike in LME / Global warehouse supplies, but more so a reduction
in financing for metal trades. Pacorini Metals Asia Pte spike in
inventory, across the spectrum of metals is not uncommon globally.
Atb Fraser
Good work on BHP Fraser. We missed it off our morning analysis. JM
ReplyDeleteThank you JM. One could argue is deliberately intended to ignore the elements of costs that investors should acknowledge.
ReplyDeleteAs a reminder, C1 cash costs include the costs of mining, milling & concentrating, onsite administration and general expenses, property and production royalties. Although you exclude those related to revenues or profits, metal concentrate treatment charges, and freight and marketing costs less the net value of the by-product credits.
If one strips back the marketing elements of Rio and BLT, via Singaporean marketing structures, it raises concerns over how the deals are justified. With some AU$7/t appearing to be charged via Singapore.
BHP’s current argument of paying the tax in Australian “only on the profit generated from the activities in the value chain” carried out in locally, may be legal. However, as Australia comes under pressure from mining revenues, reduced tax receipts and a weaker Australian dollar, there’s going to be a clamp down on such ‘efficiencies’. How the marketing division generates profits and how they're booked in comparison to the Australian prices is currently under review. Watch that space.
Cheers Fraser
FQM Fraser. A true contrarian. call. Anything more to come? CwC
ReplyDeleteCwC one hopes G&T's are utilised in the office now!!!
ReplyDeleteNo change here on First Quantum Minerals, although as a play on Copper & Nickel 70/30 (I think) its closer to its fair value now than it previously was. Upgrades/Buy notes have not plugged the leak in confidence in the FQM sellers either. Not exactly assisted with the issues in China either.
What is a risk is 'a certain party taking a longer-term' view on FQM with deeper pockets. Although personally there's better companies out there without the debt. The taxation regime in Zambia changed 1st July, far from assisting the debt covenants, even allowing for the fundraising. Oops that was rude of me, they don't appear to have any covenants now.
Sensibly, I have taken the chunk of profits on FQM. Copper just above a crucial $2.40/lb.
Cheers Fraser
You would have to be blind to miss the passion & love for the market. A good day across the boards for the so called amateur. Coming into your fold with China & Commodities. If we could just get the city speak you shy away from. A brilliant analysis putting yours truly to shame. http://ftalphaville.ft.com/marketslive/2015-07-22/ Analyst in the making - shudders. A pleasure, RR. Drinks on the way.
ReplyDelete