Hot Features
Premium
Register for real-time alerts, custom portfolio, and market movers
Yesterday’s Newsletter considered the optimistic scenario of a return to 2014 commodity price levels; but what about the downside of continued poor prices, or even a Chinese recession bringing on very poor prices, particularly for iron ore and copper?
The answer depends, in the short run, on the cost of delivering product to customers relative to the market price.
In the long run it also depends on the cost of BHP delivering to customers relative to the costs of competitors doing the same job (because the lowest cost producer will survive as others exit the industry)
Underlying EBITDA and EBIT on its main areas of mining
| Year ended
30 June US$m |
2016/17 first half x 2 |
2015/16 | 2014/15 |
2013/14 |
| Petroleum EBITDA |
4,000 |
3,658 | 7,201 |
9,826 |
| Petroleum EBIT |
720 |
-573 |
1,986 |
|
| Copper EBITDA |
3,488 |
2,619 | 5,205 |
6,127 |
| Copper EBIT |
1,828 |
1,042 |
3,353 |
|
| Iron ore EBITDA |
8,324 |
5,599 | 8,648 |
13,531 |
| Iron ore EBIT |
6,460 |
3,740 |
6,932 |
|
| Coal EBITDA |
4,022 |
635 |
1,242 |
1,258 |
| Coal EBIT |
3,256 |
-349 |
348 |
Iron Ore
The 2016/17 interim report estimates that unit cash costs of Western Australia iron ore, overwhelmingly the main source, are now expected to be less than US$15 per tonne.
In that half year to December 2016 iron ore EBITDA rose to $4,162m from $2,823m the year before. The impact of raised iron ore prices was $1,318m, productivity added $77m and changes in controllable costs saved $106m.
Considering breakeven cost which, on top of cash costs, includes royalties, freight, exploration costs, sustaining capital, depreciation and amortization, interest, and taxes, experts have noted that breakeven costs fell across the board for mining companies as the commodity downturn took hold, e.g.
“Citi estimates that Rio Tinto had the lowest break-even point in 2013 at $US55.50 a tonne while Fortescue had the highest at $US84 a tonne. While the rankings have remained the same, the gap between Rio and Fortescue has narrowed substantially, with the miners’ break-evens put at $US29.80 and $US35.90 respectively.” Business Insider Australia, David Scutt, June 7th 2016
The chart shows that the lowest cost producers are Rio and BHP, at below $30 per tonne for Cost and Freight, CFR. Market prices are in the region of $72, so that gives a reasonable margin of safety. Furthermore, if prices did fall below, say, $32 a number of competitors will stop mining because they will not cover their variable costs. This will reduce supply and at least stabilise prices, if not raise them.
Also, experts think that the big three miners, Rio, BHP and Vale, which are all projecting volume growth, could lower unit cash costs in the future especially relative to the smaller producers due to……………………….To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
