You have to admire the optimism and resilience that’s so abundant in Western Australia.
Having spent most of last week in Perth meeting with mining companies and contractors, it appears very few lessons have been learned (or remembered) from the biggest commodity rout in recent history. On the back of 9 months of surging commodity prices it appears many companies are expanding once again, and in the process adding more dirt to what are likely to be heavily over-supplied markets through 2018-19.
As ever, it’s far more important to put what companies are saying to one side and focus on what they’re actually doing, which means prioritising conversations with mining contractors. From our conversations, we learned:
- In many cases expansion work has now been re-termed as “sustaining” work to avoid signalling markets;
- Having run down trucking and equipment fleets there is now chronic tightness in these markets, with forward orders and pricing rebounding sharply (returns on some recent distressed debt deals must be eye-wateringly high); and
- Red flags are beginning to emerge, with some of the higher cost mineral deposits which are only viable on surge pricing are now being developed (e.g .Atlas Iron).
While the past excesses of the WA economy are not (yet) apparent, the willingness for companies to extrapolate spiking commodity prices is hardly a new theme (buyers beware!). And having been elected on a job creation mantra it will be interesting to see how the new McGowan Government will fare – creating 50,000 new jobs will be no small feat in an environment where many thousands have already been lost.
We continue to have high conviction in our underweight Resources position, and are focused on owning those companies that will demonstrate their resilience when gravity kicks in.