Idiotic energy shock scorches miners

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Via Goldman:

A US$3.5bn annual power bill facing upward pressure

Our analysis indicates that the Australian mining industry pays c.US$3.5bn p.a. for their electricity requirements (ex-fuel oil for trucks etc.). A confluence of factors including large baseload coal power station closures (e.g. Northern, Hazelwood), rising gas prices, increased renewables penetration and Queensland LNG-related power demand growth has put considerable upward pressure on the wholesale cost of power in Australia – we expect the miner’s power bill to increase significantly in coming years. Most at risk will be grid fed operations in Queensland and NSW. Selfgeneration companies (such as the WA iron ore miners) will have a bigger buffer on power bills. Whilst electricity remains a small component of costs (c.6.3% industry average) the rising power cost will have an impact on profitability.

US$0.5bn of power contracts to be re-negotiated by 2020e

With the power futures pointing towards tightness in the next 12-24 months, any power contract rolling off in that time frame will likely be subject to some significant percentage increase in power costs. Our analysis has indicated that there is c.US$500m of annual power contracts that expire between now and 2020e. Futures markets point towards the potential of a 20-40% lift in contract rates (2018e).

NSW grid power most at risk (gold in the hot seat)

Assets exposed to the hot spot of NSW grid power are likely to see the biggest impact on costs. Gold mines such as Cowal (EVN) & Cadia (NCM) and coal assets such as Illawarra Coal (S32) & Narrabri (WHC) are all likely to need to renegotiate power contracts in the medium term. Given the selfgeneration nature of WA assets (and the gas surplus in the state) we do not see much cost push on Australia’s biggest mining earner, iron ore.

NCM, S32, EVN & WHC in focus

Power availability and pricing is likely to remain a high level topic of interest amongst the Australian equities markets. Whilst the potential % increase in the power bill for the miners is large, the overall impact on profitability. Key stocks we highlight are ones with power contracts expiring over the next 12-24 months. Assuming a 50% rise in power contracts, we see a negative impact to 2018E earnings of: Newcrest (CLBuy) by 7%, Evolution (Buy) by 7%, S32 (Buy) by 4% and WHC (Sell) by 2%.

Energy is the idiocy that just keeps on giving. Perhaps most symbolic of the self-destruction is BHP which is busy gouging the entire east coast economy via its Gippsland JV with Exxon while it’s various mining divisions get slammed by the same cost rocket, most notably Olympic Dam.

Nothing stands in the way of the east coast gas cartel. Not even itself.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.