PHOTO: COURTESY OF RIO TINTOMineral resource plays are not immune to the global malaise
There is more than a touch of the whimsical about Australian mining prospectors, to judge by the names they have given to some of their finds. These include Alice Hill and Dawn's Hope, Little Darling Creek and Mount Doreen - not to mention Flying Pig and Thunderbox. But the mood among mining men these days is very glum.
If you need persuading that the world's industrial countries are headed for a synchronised recession, check out the commodities markets. Prices for copper and zinc are at their worst levels since 1985, and both nickel and aluminum have fallen towards their Asian financial crisis lows. Oil has been seeping steadily towards a two-year low of US$21 a barrel. The gold price, which bounced to US$294 an ounce immediately after the attack on the World Trade Center, swiftly came screaming back to US$280.
Even before the outbreak of terrorism, prices were wilting on the London Metals Exchange as the red lights began flashing for global growth. US industrial production has now fallen for 13 consecutive months, the longest continuous decline since Word War II. Manufacturing output in America is 4.8% down in a year, Japan is almost twice as bad with an 8.7% slump, and the rest of Asia, with the possible exception of China, is in the mire. Consumer confidence is falling almost everywhere, and there is more than a whiff of deflation.
All of this is bleak tidings for Australia, which earns 55% of its export earnings from mineral resources. The country is the world's biggest exporter of coal, iron ore and zinc as well as a major seller of gold, copper, nickel, lead, and alumina, oil and natural gas.
Most of the industry is facing falling orders, compounding weak prices, while it waits for a turnaround in global growth. The only medium-term relief would come from a cut in the production of minerals by some overseas competitors. And the work needed for the Beijing Olympics in 2008 might boost demand for copper used in new telecommunications networks and other infrastructure.
It was not supposed to be this way. In May this year, overseas fund managers banking on a world economic rebound, helped push the shares of resource companies up to almost best-ever levels.
Mining exports jumped 24% to a record A$55 billion (US$28 billion) in the year ended June 30. Assisted by a cheap Australian dollar trading at only US$0.51 cents, buoyancy was confidently expected to last until at least 2002-2003 - provided demand did not fall off a cliff. The trouble is that it did. The resources sectors of the stock market has since dropped back more than 20%.
Cynics used to say there was nothing like a few tanks rumbling across borders to firm up metals shares, but the frightful combination of technology and terrorism means that modern war is no longer good for miners. The conflict in Afghanistan is no exception.
The rapid decline in the price of oil presents something of a puzzle. Stumbling economies and rising inventories are responsible for the retreat from US$36 a barrel which brought soaring petrol prices, badly hurting consumers. Now sentiment suggests the price will dip under US$20. Should there be disruptions of supply, that will not happen. There is a possibility that Iraq's exports of 2.2 million barrels a day could be blocked. Baghdad and the United Nations are still quarrelling over the extensions of the oil-for-food agreement. A more scary spectre is a stepping up of the US hunt for terrorists leading to an attack on Iraq, spreading the war through the Middle East, and potentially destabilising Saudi Arabia. That scenario might see oil jump through US$40 a barrel and wreak further havoc on weak economies.
The Australian resources scene is far from dead. There are currently 53 new mining projects under way, together representing direct capital investment of US$5 billion. But most of it is foreign money. The combination of cheaper share prices and the rock bottom currency has proved irresistible to overseas predators. "Australian companies with low price earnings ratios have become sitting ducks." declares Ross Louthean, publisher of The Australian Mines Handbook. "South Africans particularly like them, because of political stability here, and the fact that their rand is in the basement with the Australian dollar."
In the past year, UK giant Rio Tinto has gobbled up iron ore miner North Ltd. and the Ashton mining group. Johannesburg-based AngloGold has taken over Acacia Resources and is embroiled in a US$1.5 billion tussle for Normandy Mining, Australia's largest gold producer. The South African Billiton group has merged with BHP to form the world's biggest diversified mining group with a dual listing in London and Sydney.
The next icon to fall will be Western Mining Corp, probably the last of the majors available to foreigners in the great mining takeaway. The North American Alcoa colossus wants to buy out the WMC interest in its alumina joint venture. BHP-Billiton, Anglo American and Rio Tinto are circling in what may become a four-way battle over the WMC carcass.
The consolidation of Australian mining assets in foreign hands has meant less money spent on exploration in the country. The new owners choose to put those risk dollars into greener pastures, where access to land is not hampered by native title complications, and the tax regime is friendlier.
According to the Minerals Council of Australia, only a paltry A$344 million was spent on mining exploration last year, down from A$506 million three years ago. Ross Lothean warns "the barely warm interest by the local market in raising fresh capital means the country's mining inventory of the future is under threat."
Where are those next Little Darling Creeks and Flying Pigs to come from?