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Miners face yuan devaluation heat

• Michael Roddan
• 6 hours ago

While China’s surprise devaluation of its currency will play havoc with commodities, and global ratings agency Moody’s has sent another warning across the bows of Australian mining services firms, new research from Morgans is adamant there is still value in smaller resources stocks.

Beijing today devalued the Chinese yuan by 1.6 per cent, following yesterday’s surprise 1.9 per cent depreciation, in actions widely viewed as a way to help boost exports from the world’s second biggest economy.

The devaluation of the yuan by the People's Bank of China reaffirmed fears about the country's economy while making metals more expensive for the world's biggest consumer, ANZ said in a research note today.

Australian mining stocks have been feeling the heat, with the materials index on the local stock exchange falling 3 per cent today. The plunge in the index, which tracks mining and resources stocks, adds to the fall of more than 20 per cent over the last twelve months.

Aluminium and copper both fell to six-year lows after the yuan’s devaluation.

Meanwhile, global ratings agency Moody’s has sent its second warning this week to Australian mining services companies, after saying on Monday that cut-backs by coal miners were not enough to offset China’s dwindling demand and that mining services companies were likely to suffer.

Moody’s analyst Saranga Ranasinghe said today that mining services companies are at an increasing risk of default, with a further weakening of firms’ credit profiles to take place over the next 12 to 18 months, as miners slash spending amid the global commodity crunch.

Last month, global commodity prices collectively hit their lowest point in more than a decade, according to a Bloomberg index which tracks the price of 22 commodities.

Moody’s Investor Services has already downgraded the credit outlooks on five mining services firms -- Ausdrill, Barminco Holdings, Onsite Rental, Emeco Holdings, and Bis Industries -- after persistent and elevated downside risk from miner’s falling earnings and cashflow.

Almost all of the firms’ revenues are generated by orders from miners, and across the group average revenue fell by 25 per cent in the year ended June 2014.

Moody’s said Emeco and Bis Industries have the highest risk of default, and flagged a potential covenant breach for Bis in particular.

“Contract renegotiations and in-housing of projects by miners will further pressure the profitability of mining services companies," said Mr Ranasinghe. "The fall in forecast investment comes on top of considerable spending reductions miners have already made”

Mining companies expect to cut investments by an additional 34 per cent in the next year, according to official data.

While single commodity producers like Atlas Iron and gold-miner St. Barbara have experiences the largest drop in earnings, larger diversified companies like BHP Billiton and Rio have been more resilient, said Mr Ranasinghe.

But Morgans analyst James Wilson says in a research note that there is a lot of potential value in smaller resources stocks and rumours of the death of small caps are greatly exaggerated.

“It’s a commonly held belief talking to investors that it’s over for small cap resources,” Mr Wilson said. "We argue that this isn't the case and there's been a steady stream of solid performances from a number of quality small caps in the resources sector."

Bauxite miner Metro Mining, for example, has seen its stock surge 87.5 per cent since March this year, after advancing its Bauxite Hills feasibility study and inking a memorandum of understanding this week.

North Queensland-focused Atherton Resources has posted a share price increase of 60 per cent over the same period, and is now reportedly the target of Auctus Chillago for an on-market takeover backed by Denham Capital. The group commenced drilling at its deposit in May with the aim of production by the end of 2016 and has seen its stock almost double.

Meanwhile, Brisbane-based Highlands Pacific, which has a market cap of $80m and owns four major projects in Papua New Guinea, is up 50 per cent since March after “investors caught on to the company’s world class asset portfolio”, Mr Wilson said.

Mr Wilson said the winning formula was a proven management track record with “aggressive timelines” for production, most of which have a 12 to 18 month horizon.

“There’s value in the sector for those companies confident in hitting their stated goals,” Mr Wilson said.


http://www.businessspectator.com.au...-and-energy/miners-face-yuan-devaluation-heat