CXG 2.27% 21.5¢ coote industrial ltd

Point of view: Evaluatingthe mining cycleThe mining cycle can be...

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    Point of view: Evaluating
    the mining cycle
    The mining cycle can be thought of as having three distinct
    phases: exploration/planning, investment/construction and
    production/consumption.
    During mining cycle slowdowns production activity will continue to
    be maintained as a priority over exploration and construction
    activity. Mining companies will seek to continue to extract value
    from the revenue producing production phases of the operation
    whilst seeking to curtail the longer term investment expenditure
    phases of exploration and construction.
    How are the phases distinguished?
    The exploration/planning phase is a period of strategic investment
    and is treated as discretionary depending on organisational
    priorities. Exploration and planning is undertaken over a long time
    horizon, up to 10-15 years. The longer time horizon means that
    companies can save on costs by cutting exploration activity in the
    short term, before reinstituting exploration activity at an
    appropriate future date with only a relatively small impact on the
    overall timing of the project.
    The investment/construction phase is a period which may also be
    associated with a decline due to one or a combination of any of
    the factors outlined below.
    �� The company may find it harder to secure finance for new
    projects. The sharp fall in demand and commodity prices could
    lead to the project being deemed marginal or uneconomic.
    �� Companies will preferentially reduce the amount of greenfield
    (undeveloped/new) projects due to the long lead times
    typically associated with these projects before they become
    revenue producing. Where expansion is required, companies
    will typically look to expanding brownfield (existing) operations.
    The production phase is when the company is able to repay the
    debt that has been used to fund the project.
    So what does this mean for mining services
    companies?
    In CommSec’s view, companies exposed to the production phase
    of the mining cycle are at a lower risk of curtailment than those
    exposed to the exploration and investment / construction cycles.
    Cassandra Meagher, Senior Industrials Analyst
 
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