The way world commodity prices are travelling, shareholders in the country’s newest miner, OZ Minerals, can expect some bad news in early 2009: asset write-downs, losses and perhaps mine closures.
The company has already reported that it is taking a wide ranging review of its operations, including whether to keep the huge Century zinc mine open in North Queensland.
OZ shares have weakened in recent days, drawing a query from the ASX about the sharp price fall.
They were trading around 60c yesterday, and hit a new all time low of 58.5c before closing at 63c, down 10c more than 13%. That’s a fall of around 75% since the company was formed on July .
In its reply to the query, OZ said falling metal prices and higher production costs may cut full-year profit.
"It is still not possible for OZ Minerals to provide a reasonable and meaningful indication of 2008 profits for the purposes of market guidance in view of the current volatility of trading conditions and metals markets,” Melbourne-based OZ Minerals said today in the reply
Slowing global economic growth has slashed demand for raw materials, sending prices for commodities tumbling with the company’s main interest, zinc, losing 56% in the past eight months when it peaked..
The company warned last month in announcing the review, that it could cut output at Century because of the price drop. Copper, nickel, silver and lead are also down, adding to the pressures on the company.
Yesterday it warned that it might write-downs the value of some assets including its shareholding in Australian uranium explorer Toro Energy Ltd. and Nyrstar NV, the world’s largest zinc producer.
"’The market value of both these companies has declined substantially since OZ Minerals last reported.
"However, as a consequence of substantially lower commodity prices, current volatility … and general higher production costs … OZ Minerals’ net profit after tax for 2008 is expected to be lower than that reported by each of Oxiana and Zinifex in those companies’ prior financial periods," OZ Minerals said.
But the decision won’t be announced until early in the new year.
The company said it would be looking at asset values, prices, currency forecasts and demand projections as at the end of the year, December 31. It said the board would be conducting an impairment test of all its assets and will be making adjustments in carrying values accordingly.
Meanwhile Macarthur Coal was confident about its outlook at yesterday’s AGM In Brisbane. Despite the slump in the world steel industry and the fall in spot coal prices and the gathering recession, the company reckons demand for its main product, pulverised coal, will remain strong as new demand appears from the power sector and competition is limited by the reluctance of companies to start new coal mines.
Demand for thermal coal will also be "robust” because of demand from power generators.
Shareholders were told that the company remains on track to achieve its half profit guidance in the range of $150 – $160 million ("highest profit since listing").
"Macarthur Coal is generating significant operating cashflows, Macarthur Coal has net cash at bank of approximately $31.1 million The company is in a strong position to be able to internally fund its organic growth plans," the company said in a presentation to the AGM.
"Following the ongoing world financial crisis the outlook for the next 12 months is uncertain; the company remains focused on extracting the financial benefits of becoming the owner operator at Coppabella (mine in central Queensland.).
"Future growth potential from portfolio of projects to be developed in line with increasing infrastructure allocation over the next five years
"(The) world financial crisis has impacted demand for all metals and commodities including steel, slackening demand has seen production cut by steel companies in quarter four (cuts in Atlantic market around 20-30%, cuts in Asia only by 1-10%); recent sharp fall in world steel production is likely to impact demand for raw materials over the next few months
"A reduction in demand has seen steel prices fall sharply from record levels early in 2008; prices currently at levels similar to 2007 – still relatively strong by historical standards; yet to be determined whether production cuts will provide support for higher prices in the near term."
The company said its 2008-09 plans call for 5 million tonnes of coal sales including approximately 3.7 million tonnes of Low Volatile Pulverised Coal (PCI coal) .
The company’s Japanese fiscal year 2008 coal prices settled with a significant price increase achieved, however Macarthur Coal had a large amount of “carry-over” tonnage that will impact the final price received for coal sales in fiscal year 2009, but the industry is facing rising costs.
Despite the upbeat news, the market wasn’t impressed: the shares sank to a new 52 week low of $3.38 before ending off 4% at $3.69.
