Aussie Gas Fire Is A Reminder That Energy Supplies Are Crucial To Metal Producers
By Our Man In Oz
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The share price of Oxiana rose by four cents (1 per cent) today, which is certainly not a headline grabbing event by the Australian copper, gold and zinc miner. But, what makes any rise rather interesting is that Oxiana is emerging as a proxy for the investment benefits which come from “supply shock”, arguably the most important factor in metal markets at this stage of the boom. Twice in the past week Oxiana has reported “trouble at mill”. First with a small fire at its Sepon copper/gold project in Laos, and yesterday with the loss of gas to produce electricity at its Golden Grove copper/zinc mine in Western Australia.
The Sepon fire was an event unique to Oxiana. The gas outage, caused by an explosion and fire on Varanus island off the coast of Western Australia, was a much more significant event in the mining world. Varanus is a central processing centre which collects gas from a number of nearby fields before piping it ashore to supply about 30 per cent of the gas used in Western Australia, site of some of the world’s biggest mines. Customers for gas from Varanus include Oxiana, BHP Billiton, Rio Tinto, Alcoa, Newcrest, Minara and Jabiru Metals. Iluka Resources has also just announced the shut down its operations along the west coast, and it is one of the world’s biggest producers of ilmenite, rutile and zircon.
In theory, Oxiana should have suffered a reasonable sell-off being the double victim of fire. In fact, the stock has held its ground remarkably well because metal prices continue to resist a threatened widespread decline caused by new mines satisfying strong Asian demand – an event which is yet to happen. Not only are the new mines failing to perform,or even arrive, but the old mines are being hit by events such as those at Sepon and Varanus Island. In other words, Oxiana is benefiting as much from a shortfall of metal supply as it is being hurt by losing a few days of output.
Yesterday, the Varanus fire triggered a wave of production warnings from gas customers, and at least one Australian stockbroker issued a production downgrade alert. Patersons said companies likely to face production downgrades included Minara Resources (nickel), Newcrest Mining (copper and gold) and Tap Oil (a gas producer using the Varanus hub). Oxiana said it was confident of maintaining production at Golden Grove by switching from gas to diesel power, adding that the “duration of the (gas) outage was currently unknown”. In response, the Oxiana share price dipped to A$2.96 on Wednesday, and then rose to $3 today.
While loss of gas from Varanus will not severely damage the world’s supply of minerals, it will cut some production, and/or raise costs for a measurable percentage of the world’s nickel, copper, gold, zinc, iron ore, and even ammonia for fertiliser production. Most gas customers, like Oxiana, will switch to diesel as a back-up fuel pending repairs to the gas facility, a process likely to take weeks, and possibly months. While that happens metal market traders will be watching carefully to see what happens to output rates, especially nickel and alumina which are big energy users and because mines in Western Australia account for 9 per cent and 15 per cent respectively of global output.
But, and this is the critical point for investors, the Varanus Island fire is a reminder of three critical facts.
First, that Australian mines are remote from the world and, in most cases, remote from their suppliers of essential services. In most cases there is no nearby back-up energy supply apart from diesel, and that is both expensive and in short supply.
Second, that the global supply of most commodities is finely balanced, and it doesn’t take much to move from a small surplus into a deficit, and
Thirdly that this is the latest reminder of how some of the world’s most important mineral producing regions are running at full capacity and a small incident can have magnified consequences.
Earlier this year production of gold and platinum was cut in South Africa when electricity supplies were reduced because of excess demand. Output levels have been rising since a few dark weeks in February, but the central problem remains, there is not enough electricity to meet the demands of both cities and mines. Politically, cities will always win that argument, even if it means shutting some mines.
The core issue with electrical power and energy in general is that it has become the “show-stopping” factor for a number of mining industries. That’s why oil and coal prices have soared as buyers scramble for limited supplies. It’s also a reminder that the global energy shortfall virtually guarantees more supply shocks in the future, maintaining pressure on mineral prices and underpinning mining company share prices. |
