Will 2015 be the year of the Resources Turnaround?

THE CONFERENCE CALLER: There is probably no great surprise that the two worst performing sectors for 2014 were Energy and Resources.

However, the stark reality has not really been demonstrated to the masses in such brutal terms as a slide presented during his opening address to the 2015 RIU Explorers Conference in Fremantle.

 

Obviously one of the key reasons the materials sector had such a bad trot has been the plunging of the price of iron ore, albeit having seemed to have settled at around US$60 per tonne.

“Iron ore is a key determinate of what the materials index does,” Patersons Securities resources analyst Jason Chesters told the opening morning crowd at the RIU Explorers Conference.

One aspect facing the resources sector for 2015, according to Chesters, will be the sector having to confront a continued phase of introspection, with cost savings being a necessity to conserve cash.

New resources projects will continue to be hard to get up and fund as the market maintains its current focus on the other darling sectors of property trusts and healthcare.

Chesters said that, in Patersons’ view, the worst of the commodity price falls, or corrections, have been and gone.

“For many commodities, the next 12 months we will see price increases instead of declines,” he said optimistically.

Chesters did acknowledge market sentiment towards resources is liable to remain negative for the immediate future as investors still feel the pain of the negative returns they have endured from the recent past.

This pain is most likely to be passed on to the junior exploration companies as they struggle to attract the funding needed to get their new projects up and running.

“Despite that, there are signs and there are cases where there are substantially cashed up off-shore funds, in particular private equity funds, that are looking to invest,” he said.

“But from an Australian perspective they are nervous about the currency loss, as they have seen the recent 13 to 24 per cent decline in the Australian dollar.

“So clearly they are still a little nervous about investing in Australian stocks.”

Chesters highlighted Patersons research which discovered that of the 600-plus explorers gracing the boards of the Australian Securities Exchange (ASX) less than half have little to no cash on hand.

 

The statistics show only 325 of these companies have more than $1 million in cash, two thirds of which have less than $500,000, 40 per cent have less than $250,000 and 25 per cent have less than $100,000.

“If all of those 325 companies were to raise money today – just $1 million to keep the lights on – would require $324 million of fresh capital.”

On a positive note the Patersons’ research found there are 39 of the 600-odd companies with net cash backing greater than 100 per cent of their market cap.

According to Chesters the recipe for a successful resources sector includes the following ingredients:

Global growth improving – The IMF forecasts global GDP growth of 3.5 per cent for 2015 (up from 3.3 per cent in 2014), rising to 3.7 per cent in 2016. Led initially by advanced economies;

Commodities with supply constraints maintain their appeal (copper, zinc, uranium, etc.);

Cost controls over the past few years coupled with lower energy prices should place companies in a stronger balance sheet position;

Merger and Acquisition activity – In the current depressed environment and with strong balance sheets, it may be more attractive to acquire than to discover;

Cash flows and yield remain an area of focus. Therefore production or near term production is preferred. The market remains focused on dividend yield in a low interest rate environment.