AUSTRALIA'S biggest mining companies - which have underwritten the country's economic growth since the financial crisis - are likely to start pulling back on once-optimistic plans for investment, according to one of the biggest investors in the resource industry.
But Australian Foundation Investment Company, which has former BHP Billiton chairman Don Argus on its board, stopped short of declaring the mining boom over, insisting that China would support commodity prices for years.
The comments follow a rethink by economists on the outlook for the mining investment boom.
BIS Shrapnel will today release its latest set of long-term forecasts, saying the mining investment boom will soon end, but that Australian economic growth will not stall.
Concerns about the global outlook weighed on the sharemarket yesterday, as stocks suffered their worst day since June 4, with $21 billion wiped from the market's value on fears of slowing Chinese growth and a blowout in Spanish debt.
The miners were a big drag on the market, which lost 1.6 per cent in value.
Fortescue Metals dropped 7.1 per cent while Rio Tinto lost 3.5 per cent and BHP dropped 2.6 per cent.
AFIC, which has about $4.5 billion invested across Australia's top companies, yesterday sounded a note of caution on the outlook for mining investment, but managing director Ross Barker believes pricing will hold up in the long term, despite recent falls in key commodities such as iron ore and coal.
"Our view over the medium to long term is that China will probably continue to support commodity prices," Mr Barker said.
"However, resource companies would be "starting to think about the economics of investing such large amounts of money . . . and whether their capital expenditure can be justified by the current level of prices".
Corporate Australia will open its full-year books to investors in coming weeks.
Mining giants BHP Billiton and Rio Tinto are expected to post declines in profit of 19 and 24 per cent respectively, after a 16 per cent fall in global commodity prices over the financial year.
Mr Barker said his fund was more exposed to energy stocks than resources.
"Energy's a particularly good place to be . . . we're mostly exposed to the conventional gas industry, both through companies like Woodside and Oil Search, and also [to] coal seam gas through Santos and Origin, and a little bit of AGL," he told BusinessDay.
"[It's] likely to be a sector that stays in demand, particularly . . . in an environment where, in due course, people will want to move away from coal into less-carbon-footprint energy sources."
Mr Barker was speaking as AFIC reported a 5.8 per cent drop in full-year profit to $219.9 million, down from $233.3 million. AFIC's mostly blue-chip portfolio fell 4.8 per cent in the full year, compared with a 6.7 per cent fall in the S&P/ASX 200 Accumulation Index.
The profit figures include a $17.7 million contribution from participation in the BHP Billiton off-market buyback.
AFIC prides itself on its deeply conservative investment strategy. Its $4.5 billion portfolio reads like a roll-call of Australian blue-chip stocks, with a heavy emphasis on banks and big miners, including more than $452 million of shares in BHP Billiton. Its top five stocks by total value invested include Commonwealth Bank, BHP Billiton, Westpac, NAB, and Wesfarmers.
The fund yesterday declared a final dividend of 13? a share, fully franked, flat on the same time last year.
AFIC shares closed 6? higher at $4.38.
Frequently Asked Questions about this Article…
What did AFIC say about China and the outlook for commodity prices?
AFIC said its medium- to long-term view is that China will probably continue to support commodity prices. While the company sounded a note of caution about a slowing mining investment cycle, managing director Ross Barker expects pricing to hold up over the years thanks to Chinese demand.
How did AFIC perform financially in the full year and what were the key numbers?
AFIC reported a 5.8% drop in full-year profit to $219.9 million (from $233.3 million). Its mostly blue‑chip portfolio fell 4.8% over the year, compared with a 6.7% fall in the S&P/ASX 200 Accumulation Index.
Which major companies and sectors make up AFIC's portfolio?
AFIC's roughly $4.5 billion portfolio is heavily weighted to Australian blue‑chip stocks, especially banks and big miners. Its top five holdings by value include Commonwealth Bank, BHP Billiton, Westpac, NAB and Wesfarmers, and it holds more than $452 million of BHP shares.
How exposed is AFIC to BHP and did it benefit from the BHP buyback?
AFIC has significant exposure to BHP—more than $452 million of shares—and its profit figures included a $17.7 million contribution from participating in BHP Billiton's off‑market buyback.
What is AFIC's investment style and dividend approach?
AFIC prides itself on a deeply conservative, blue‑chip focused investment strategy. The company declared a fully franked final dividend that was flat on the prior year, and its shares closed at $4.38 on the day reported.
How did mining stocks affect the market recently and which miners fell the most?
Concerns about slowing Chinese growth and European debt pressure weighed on the market, with miners dragging the index lower. In the period reported, Fortescue Metals dropped about 7.1%, Rio Tinto fell about 3.5% and BHP lost about 2.6%.
How is AFIC positioned in energy stocks and why could that matter to investors?
AFIC said it is more exposed to energy than resources, with holdings in conventional gas and coal seam gas players such as Woodside, Oil Search, Santos and Origin, plus a small position in AGL. Ross Barker noted energy demand should stay resilient and that investors may increasingly favour lower‑carbon energy sources over coal over time.
What are analysts saying about the mining investment boom and what does it mean for investors?
BIS Shrapnel's long‑term forecasts suggest the mining investment boom will soon end, although they expect Australian economic growth not to stall. AFIC and other commentators caution that resource companies will be re‑evaluating large capital projects against current price levels, so investors should watch capital expenditure plans and commodity price trends closely.
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