Australian mining companies have been hard hit by falling commodities prices and rising costs. But Petra Capital Analyst Andrew Richards believes his country's resource sector has turned a corner. In this interview with The Metals Report, Richards says that costs are falling and China's need for Australian metals will continue to grow. He also names companies that are well positioned to flourish in the near future.
The Metals Report: Australian mining Newcrest Mining Ltd. (NM:TSX; NCM:ASX) has announced huge layoffs and capital expenditure cutbacks. Does this signify a crisis in the space?
Andrew Richards: "Crisis" is certainly a strong word, but there is definitely a correction occurring in the market. Gold and iron ore in particular have come off their peaks. What we are seeing in Australia is a lot of cost-cutting across the board. That's probably something that needed to happen because labor costs had risen significantly over the last few years due to competition for personnel. The big companies, such as BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK) and Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK), have said that Australia has become relatively uncompetitive because of very high labor and engineering costs.
With the fall in some of the commodity prices, companies have had to lay off people where they can and put a stop to some of the planned growth projects. Newcrest was an example of that. Companies are now focusing on cash flow rather than just growth. They want to maintain or improve margins where they can. But I will say I think Australian costs have peaked and are already on their way down.
TMR: Australian mining billionaire Gina Rinehart last month accused Prime Minister Julia Gillard of treating the mining industry like an ATM. How much of a threat to the industry is the Labour government's mining tax?
AR: The mining tax, at this stage, affects only iron ore and coal. And companies need to make a profit of at least $75 million ($75M) before that tax kicks in. It certainly has an impact on big companies, such as Fortescue Metals Group Ltd. (FMG:ASX), BHP and Rio Tinto. Having said that, the government had estimated significantly higher revenues from the tax than it has received. Maybe that's a reflection of the pullback in commodity prices, particularly iron ore.
Moving forward, there is an election in Australia in September, and the polls are saying that the current government will lose. The incoming government, should they win, has said publicly that they would remove this tax. So we'll wait and see what happens in September.
TMR: Let's talk about some of the companies you cover. Alkane Resources Ltd. (ANLKY:OTCQX; ALK:ASX) has zirconium, niobium and gold. What are the challenges of managing a company that has such diversified resources?
AR: Alkane's Dubbo zirconium-niobium project is certainly unique. With these sorts of projects, you have to make sure you have a flowsheet that works and is proven. Alkane has had a pilot plant operating for over four years now, so it has actually proven that flowsheet and sent product off to customers. It has signed an offtake agreement with a significant Japanese company, Shin-Etsu Chemical Co. Ltd. (SHE:Fkft). Obviously, there are always risks as you scale up from the pilot plant to the major plant, but I think the company has mitigated them as much as possible. The key now is getting Dubbo funded.