Markets: A light down the line for Bradken

Bradken managing director Brian Hodges is nothing if not an optimist. After a 33 per cent fall in 2013 net profit to $66.9 million for the mining products, engineering and rail company, Hodges says things are looking up.

“We expect mine production to show steady increases again in financial year 2014 for most commodities, and the energy sector to remain strong for oil and gas products,” he says in an ASX statement.

Yet Hodges acknowledges that “miners will continue to restrict expenditure to improve cash flow due to weaker prices and high cost pressures”.

“Ultimately,” he says, “new capital expenditure will be required”.

It’s hard to disagree with this notion. Like all businesses, a certain amount of capital expenditure is needed to keep operations going. The miners, of course, are well aware of this. But after years of expansion and spending on areas that are now seen as unprofitable – Rio Tinto’s aluminium business springs to mind – they are now extremely cost conscious.

BHP Billiton’s chief executive Andrew Mackenzie wants to make do with what his company has. Mackenzie talks incessantly about productivity improvements. Rather than seeking board approval for spending on projects that are viewed even internally as good – such as potash – the St Kilda Football Club fan is hunkering down.

Likewise, Rio Tinto’s chief executive Sam Walsh is focused on cost improvements. Last week he told reporters he was “pretty pleased” with $US977 million ($1.06 billion) in pre-tax cost reductions in the first six months of 2013. The company is renegotiating rates for about 1500 of its projects.

Bradken, as Hodges admits, is reducing its “operating and overhead costs” given what the world’s biggest miners are doing. It is also reducing capital expenditure and working capital in order to “maximise cash flow” and ensure debt does not balloon.

Hodges says the first half of the 2014 financial year will be challenging. Even as those in the mining sector do their best to cast the best possible light, the fundamentals still remain rather dour. After all, Hodges expects 2014 earnings to be “broadly comparable” to 2013.