Petepan made a few good points – mainly the following: NWH's...

Petepan made a few good points – mainly the following:

1. NWH's good cash position, and the related matter of CAPEX falling away in bad times.
2. Mines become exhausted, so new ones must be opened.
3. The main asset, yellowgoods, has good resale value.

There is not much to add to Point 1, except the obvious fact that in a cyclical game, a well equipped and cashed up (includes low debt) company can sit out the poor years, and potentially still pay dividends.

On Point 2, the tonnages exported by the large miners are increasing to compensate for the lower price, so they must continue to open new mines as they exhaust the existing ones.Miners will initially expand brownfield mines, but in time they will run out of brownfield options, and then they will move on the easier greenfield expansion options. I am unsure how long a typical mine lasts – something like five to twenty years, I'll hazard, so about twelve years on average, and hence new mines should open periodically. In addition, there is another factor at work, some steel makers do not like relying on the big miners, so they are interested in starting up their own mines.

On Point 3, yellowgoods has a very good resale market, because in many cases the same sort of equipment is used in mining as is used in civil works. An interesting point is that if a miner wants to be an owner-operator, then rather than buying equipment and building up the teams required, it makes sense to buy a suitable part of a mining services provider's business. Roy Hill, for instance, will start mining using DOW, but it plans to become a miner-operator, so it could at some time make either DOW or NWH an offer, or accept an offer made by them. This is what BHP did in 2011 – see http://www.bhpbilliton.com/home/inv...liton-to-acquire-Hwe-Mining-subsidiaries.aspx, which reads in part:

BHP Billiton has signed a Heads of Agreement with Leighton Holdings to acquire the HWE Mining subsidiaries that provide contract mining services to its Western Australia Iron Ore operations. The Heads of Agreement relates to the mining equipment, people and related assets that service the Area C, Yandi and Orebody 23/25 operations. These operations collectively account for almost 70 per cent of Western Australia Iron Ore’s total material movement. The purchase price is US$735 million (A$705 million), subject to working capital adjustments.

BHP Billiton President Iron Ore, Ian Ashby said: “While this move to an owner-operator model will remove a layer of complexity and costs from our business, the real focus of this proposed transaction is the work force. Transitioning to owner operator in this way, rather than by replacing contractors through direct recruitment, is a lower risk strategy as it would be challenging to replace the highly skilled and long serving HWE employees in the current environment.”