Resources groups rock solid
By Robin Bromby
19nov05
BY the end of 2011, the way things are going, BHP Billiton will be sitting on $US28 billion in surplus cash. That's the resources sector for you: broke one decade, rolling in it the next.
Deutsche Bank, which made the 2011 projection, points out that the resources sector has returned an average 14 per cent earnings growth since 1978. The bank's analysts believe BHP is in the middle of what they call a "super-normal period of growth" due to the boom in commodity prices. Likewise with most of the big resources groups.
But the BHPs of this world were no overnight sensation. It took more than 50 years for that company to become the Big Australian. The former Western Mining was similarly the product of many decades of hard work, slow growth, going through bad patches, before it achieved the respectability that attaches to blue chip stocks.
The big resources players are now about as rock-solid as any investment. Even if the commodity boom sours - possible but unlikely - the big miners have diversified so greatly that it would take a significant global slump to hit everything all at once.
Again, take BHP. There's aluminium. There's copper (including Escondida, the world's largest copper mine), lead and zinc (its Cannington mine also produces silver, the single largest world source of the white metal) and uranium (Olympic Dam is the world's largest uranium deposit and the world's fourth-largest copper one).
Then there's coal, coking and thermal, being mined in Australia, the US, South Africa and Colombia.
It's one of the big three in iron ore (Rio Tinto and Brazil's CVRD being the others).
Add manganese, the huge Ekati diamond mine in Canada, and a half share of a South African mineral sands operation. BHP is the world's third-largest nickel producer.
Then there's black gold and its offshoots - crude oil, natural gas, ethane, liquefied natural gas and liquefied petroleum gas.
Rio Tinto is equally impressive: iron ore, copper, aluminium, titanium dioxide, gold, uranium, nickel, silver, lead and, in the form of Dampier Salt in Western Australia, the world's largest exporter of that commodity.
But there's the rub for investors looking to construct a solid resources base to their portfolios. Buy BHP or Rio and you buy a global story.
But you have to look elsewhere if you want to choose a particular commodity story. Uranium is all the rage at present. It fetched $US7 a pound in 2001, but this week yellowcake was worth $US33.95/lb.
BHP might have the world's largest deposit but, according to a new report on the mineral by Bell Potter Securities, uranium this year will account for only 0.5 per cent of BHP revenue.
It's a similar picture at Rio Tinto, which controls the Rossing mine in Namibia and the Ranger operation in the Northern Territory.
In 2006, uranium is expected to contribute a mere 0.6 per cent of Rio's earnings. There is no question that there's a hunger for uranium.
The oversubscribed floats and soaring share prices are testimony to that, as companies like Monaro Mining, Marathon Resources, Curnamona Energy, Summit Resources, Redport, Nova Energy and Hindmarsh Resources have been eagerly sought.
Yet only one other Australian company is anywhere near production: Paladin Resources, which will be mining in Namibia next year.
And question marks hang over many of the uranium newcomers. Will they find enough and, in some cases, will they be able to overcome state government bans on mining?
While there is uranium mania at present, putting your financial future on junior wannabes can be a perilous undertaking.
Many investors have painful memories of other booms. Just ask former shareholders of companies such as Yinnex, Matlock Mining, Paget Mining or Golden Fortune Mining. The last mentioned was a particularly bad joke, its end coming when it couldn't raise the 1989 stock exchange listing fee.
That brings us back to the 50-year perspective.
Who has got that many years in front of them, waiting for a junior to build itself into a mining house? Ask shareholders in Austpac Resources, which has been going since the mid-1980s, starting as a gold explorer, then switching to synthetic rutile technology.
It is now building a demonstration plant at Newcastle, an important step, but Austpac shares are still around 3c. No sign of any price take-off on the horizon, let alone dividends.
That leaves the mid-tier companies, of which there are too few.
Many of their number - like Delta Gold - get swallowed up. Even those global operators in the category below BHP and Rio are not safe: think of Barrick Gold's unsolicited lunge at Placer Dome (and Barrick has already swallowed Homestake Mining), Newmont Mining taking over Normandy and Franco Nevada, or Inco and Falconbridge merging.
And there's Xstrata waiting in the wings, looking for anything that's cheap. Or, for all their size, they can go bust, as did Pasminco and Sons of Gwalia.
Three Australian mining companies do offer both production (therefore, an earnings stream) and size. Jubilee Mines is an emerging force in the world nickel business. It has formed alliances with nickel juniors to add to its land bank in Western Australia.
Consolidated Minerals is a textbook example of how to build a mid-tier diversified miner. It started with a manganese mine, added a chromite one, picked up an iron ore deposit in the Pilbara, bought Reliance Mining to get the Beta Hunt nickel mine in Western Australia and has subsequently expanded nickel exploration.
ConsMin has bought the right to half of Titan Resources' Armstrong nickel deposit and now has a financial finger in Jabiru Metals' zinc-copper pie.
Straits Resources is another producer with diversification. Its highly profitable Sebuku coal mine in Indonesia underpins the company's operations.
It is now in copper production at Whim Creek in the Pilbara. It has gold in Indonesia and Australia, an antimony deposit in New South Wales and, in Western Australia, only environmental procedures stand between Straits and a large solar salt farm getting into production. Salt is in big demand, for both industrial and food uses in Asia.
Long term, it's hard to go past a gold producer. Yesterday gold was fetching, in Australian dollars, $656 an ounce.
That means great margins for any company digging it out of the ground.
In fact, the gold price is now hovering at 18-year highs. Bears love gold because they comfort themselves with memories of Homestake Mining in the Great Depression.
The South Dakota miner's shares stood at $US80 when the great crash occurred in October 1929. By 1935 they were worth $US495. Homestake paid dividends every year of the Depression, including $US56 a share in 1935.
If you find that story appealing, the two largest gold producers listed here are Newcrest Mining and Lihir Gold. Bendigo Mining is going to be a force to be reckoned with as production ramps up at its Victorian operation.
The dark horse - mainly because all its assets are in Papua New Guinea - is Highlands Pacific, soon to be a gold producer.
It is in partnership with the Chinese on the giant Ramu nickel project and has the world-class Frieda copper-gold deposit waiting for the green light.
© Queensland Newspapers
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