This is a warning worth listening to if you haven’t already, from Citi:
Further Cracks in Mining Capex — Rio Tinto has announced yesterday its capex guidance for 2015 stating that it expects capex to total $8bn in the year. This is notably lower than our Metal and Mining team’s original forecast of $10.5bn for the year and represents a 53% cut in capex (vs. a 38% cut expected by our Metals and Mining team) from the $17bn capex levels in 2012. Rio Tinto now expects capex to fall for three consecutive years (2012: $17bn, 2013: $14bn, 2014: $11bn and 2015: $8bn). The new guidance follows the announcement last week by the company that expansion plans for its Western Australia iron ore mines would be completed at $3bn less than previously expected. Furthermore, Vale also reduced its capex guidance by 7% Y/Y to $13.9bn in 2014E, lower than the $15bn of capex in 2013E (Citi: $12bn). It is worth noting that Vale also lowered its guidance by 4% Y/Y on iron ore production for 2014E (ex-Samarco) to 312mt from 326mt previously (Citi: 310mt) and slightly ahead (c2-4% Y/Y) of 2013E production of 300-305mt. Overall, the news confirms the major change that is taking place at miners which continue to focus on cost and returns at the expense of capex. Rio Tinto is one of the three largest spenders on mining capex (the other two are BHP Biliton and Vale).
We Remain Cautious On Mining Capex — This is supportive of our cautious view on mining capex. We turned cautious on mining capex in our March 2012 report Mining Capex – Downside Risk Emerging followed by numerous follow-up reports including Global Mining Capex – 2014 Risk Lies on The Downside and Mining Capex – How Much More Downside Left if the Bear Case Materializes?. Mining capex cuts are no longer “new” news but we believe the extent of downside, especially in 2014/15, are still underestimated by the market. Downside risks remain especially if our bear case (slower aftermarket growth environment over the next couple of years coupled with a potential pricing pressure in both equipment and aftermarket) materialises.
Citi goes to warn about mining equipment makers. But the same can still be said of all mining services firms. I know they’ve been caned but I’m of the view that this almost a NASDAQ like bust confronting the sector. Cost-out deflation is a secular trend for miners and what do you think is going to happen when $200 billion in LNG capex rolls off over the next three years?
Here’s a chart of some leading players:
The pain is pretty advanced but I’m of the view that this is a NASDAQ style bust for mining services. When the dust finally settles there’ll be a lot fewer of them. This knife has further to fall.
