Iron ore’s spiral to within an inch of $US40 a tonne separates Rio Tinto, BHP Billiton and Brazil’s Vale sharply from the pack, leaving them as the three players making solid cash margins on exports to China.
Iron ore is the major cash cow for BHP and Rio and the big falls in the past month from about $US50 a tonne is heaping more pressure on cash flows.
Any sustained run of prices at $US40 a tonne levels will also heighten calls for BHP to cut its annual $US6.6 billion dividend payout, and for Rio to review its $US4.1 billion progressive dividend.
Every $US1 a tonne change in the iron ore price affects BHP’s net profit by about $US148 million, and Rio’s underlying earnings by about $US180 million.
From Dumbfax this afternoon comes an article titled A $US40 iron ore price will help BHP, Rio:
The crux of a barely made argument is that high cost miners will go out of business. Thankfully the article fails to put lippy on the pig after all. But the always reliable Stephen Cauchi succeeds via Citi:
“This (nadir) may still be a little way off,” Citi conceded. Nevertheless, “the difficulties of timing these inflection points suggest considering starting to increase positions in resource stocks, and being overweight in portfolios.”
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…”There’s no let-up from the relentless downtrend in the resources cycle, as commodity prices, earnings and equity prices continue to plumb new depths,” said the paper.
And investors who have tried to pick the bottom recently have been burnt, it said. “The super cycle has now been unwinding for four years but investors that have been attracted back to resource stocks by modest valuations have so far done poorly as a result.”
The price-to-book ratio of resources stocks is at a low point historically and at its biggest discount to industrial stocks in at least three decades.
Another indicators indicating more bullish times ahead for resource stocks included cutbacks in supply boosting prices over the near-term.
“A lack of investment looks to be resulting in significantly weaker supply growth over coming years,” said Citi. “Our analysts see (this) as a catalyst for a stabilisation and recovery in prices.”
Damn that’s poor. The only reason book value is so cheap is that assets haven’t been written down yet. But they will be. As for supply cuts, phewy, it’s not been enough in coal, copper, zinc or anything else.
The time to buy miners will when you no longer want to.
