But then look at Woodside – a change of management, a tough decision or two and the company is no longer seen as a loser of value (or questioned about its use of capital), but now a favoured stock because of that capital return decision last month.
The shares have risen strongly (they closed yesterday at $37.18) in the wake of the decision to give back cash to shareholders and target an 80% payout ratio for "several years". But interestingly that announcement didn’t see prices reach the 2013 high in February of $39.21 as the gains were tempered by the weakness in global oil prices.
Woodside – 12-Month Performace
Still the shares leap 9.7% on the day of the announcement, which tells us that there’s pent up demand for cash returns from investors who continue to hunt for yield and big dividends (see the way the ANZ shares rose after an 11% lift in 2012-13 interim dividend last week).
Now investors are looking to other miners, especially the likes of BHP Billiton and Rio to follow suit – we may have to wait until August to get a signal when those two reveal full year and interim profits respectively.
Investors should understand though that resource companies can turn off the cash as quickly as Woodside turned it on because they depend on fluctuating global prices, and have varying cash needs linked to project developments. Should Woodside see the opportunity for a big acquisition, then the flow of cash to shareholders will stop to allow the deal to happen.
It also has stakes in new gas areas in Africa and off Israel, as well as its unrequited ambitions for the huge Browse project in northwestern WA.
But a decision to spend money and not return the cash to shareholders will see Woodside shares sold off. Investors should realise that resource companies only grow by spending a lot of money, some of which will be wasted. The performance of management has to be seen in that light and weighed accordingly.
And then there’s OZ Minerals, which continues to promise much and under deliver, as we saw with the March quarter production report which downgraded production forecasts. That saw the shares drop to a 10 year low and the shares have continued to ease. The concession that copper production could be up to 10% lower in 2013 wasn’t taken well by investors (shades of Newcrest).
The shares closed at $4.38 yesterday, still lower than the $4.44 reached in the big one day sell off last month when the production report was released.
OZL – 12-Month Performance
OZL will now produce between 82,000 and 88,000 tonnes of copper in 2013, rather than the 90,000 to 95,000 tonnes that were originally forecast, which in turn was down sharply from more than 110,000 tonnes in previous years because mining at the ageing Prominent Hill mine in South Australia has started to push into low grade ore. Costs are rising regardless of the lower output.
Copper prices have been falling in recent weeks and forecasts are for a tough year with production likely to be outstripped by production – despite Rio Tinto’s loss of 100,000 tonnes of metal from its huge mine in Utah in the US. (The Bingham Canyon mine produced 163,200 tonnes of copper last year, as well as 200,000 ounces of gold, so the loss will be significant).
But there was a bit of good news in that gold production at Prominent Hill is expected to remain unchanged this year at 130,000 to 150,000 ounces.
And finally there’s QBE, a faded blue chip if every there was one. Weak earnings, new management, a dividend cut and an expansion plan that ran off the rails – all the elements of less than adequate management at the end of a long time at the top, and poor overnight from the board.
There are a couple of caveats – yes the company wash hit by the impact of the GFC which has slashed returns from its huge pool of reserves (more than $US26 billion) and the strength of the Australian dollar has surprised.
And the company has suffered a battering from natural disasters (like all other insurers) in Australia, the US, Chile, New Zealand and Japan since 2010.The financial impact of those was huge, but while insurers such as those in the Berkshire Hathaway group controlled by Warren Buffett, have managed to ride out these disasters, QBE, a globally significant reinsurer, is struggling.
The shares are trading round $13.50, compared to the 52-week range of a low of $10.09 (reached last December) and $14.61 high last August. But it has been much higher. Can anyone remember the $35 peak back in 2007?
QBE – The Lost Decade
In fact QBE’s share price is now around where it was in 2004, when it was trusted by investors and the acquisition program of former CEO, Frank O’Halloran seemed to be creating value.
QBE had its credit rating cut by Moody’s last month because of a weaker earnings growth and concerns about its debt levels. Moody’s trimmed QBE’s credit rating from A3 to Baa1 with a "negative" outlook, which usually means there is a one in third chance of a further cut in the next 18 months.
It means the company remains under review and the plan to cut a couple of hundred million dollars of costs and more than 700 staff from its operations around the world, will have to start producing convincing results.
