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 is AFIC's view on China and its impact on commodity prices?
AFIC's managing director Ross Barker says their medium- to long-term view is that China will probably continue to support commodity prices. While AFIC is cautious about mining investment plans, it stopped short of declaring the mining boom over.
Are Australian mining companies likely to pull back on planned investment?
Yes. The article says Australia's biggest miners are likely to start pulling back on once-optimistic investment plans as they reassess whether large capital expenditures can be justified by current price levels. BIS Shrapnel also forecasts the mining investment boom will soon end, though it doesn't expect Australian economic growth to stall.
How have miner share prices reacted to concerns about China and global debt issues?
The sharemarket suffered its worst day since June 4, with about $21 billion wiped off value amid fears of slowing Chinese growth and Spanish debt concerns. Miners were a big drag: Fortescue Metals fell 7.1%, Rio Tinto lost 3.5% and BHP dropped 2.6%, contributing to a 1.6% market fall.
How is AFIC's portfolio positioned and how did it perform over the year?
AFIC manages about $4.5 billion invested across Australia's top companies with a conservative, blue‑chip focus—heavy on banks and big miners. Its portfolio fell 4.8% over the full year compared with a 6.7% fall in the S&P/ASX 200 Accumulation Index. Full-year profit was down 5.8% to $219.9 million from $233.3 million, including a $17.7 million contribution from participation in BHP Billiton's off-market buyback.
How much exposure does AFIC have to BHP Billiton?
The article states AFIC holds more than $452 million of shares in BHP Billiton, making it one of the fund's largest individual stock exposures.
Why does AFIC favour energy stocks and which energy companies are mentioned?
AFIC says it's more exposed to energy than resources because energy—particularly conventional gas and some coal seam gas—looks likely to stay in demand even as markets gradually move to lower‑carbon options. The article mentions Woodside and Oil Search (conventional gas), Santos and Origin (coal seam gas), and a small holding in AGL.
What profit changes were expected for major miners BHP Billiton and Rio Tinto?
The article says BHP Billiton and Rio Tinto were expected to post profit declines of about 19% and 24% respectively, following a 16% fall in global commodity prices over the financial year.
Did AFIC declare a dividend and how did its shares close?
AFIC declared a final dividend described in the article as '13? a share, fully franked' (as reported). AFIC shares closed 6? higher at $4.38, according to the same report.
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