The dirt on our miners
Summary: Quarterly production reports will start to flow out of commodities space over the coming weeks. By and large, investment banks and analysts are expecting a benign reporting season, but this may not be matching up with current trader activity.
Key take-out: There shouldn't be too many surprises in the mining and oil space this quarterly reporting season, but investors might note that short selling is ramping up in the area despite being at odds with most of the recommendations of professional analysts.
Investors in mining and oil stocks have had a good year so far, but over the next few weeks they will get a preview of what lies ahead as quarterly production reports start to flow.
Short sellers could also target the sector based on the belief the next leg for some stocks could be down.
Over the first nine months of 2017, the ASX broad-based metals and mining index returned 10.6 per cent, whereas the all-sectors ASX 300 index rose 3.9 per cent.
The difference can be explained by a continuation of a powerful resources rally which started in early 2016. Standouts of the rally have included iron ore, gold, lithium and other battery-metal stocks.
The quarterly reporting season, which will only reveal production volumes and not financial performance, should set the scene for the next set piece in the resources sector – annual meeting season.
Most investment bank analysts are expecting a benign set of quarterly production reports with few surprises, not that this optimistic outlook has stopped a persistent attack of short sellers. Four mining stocks are at the top of short-sold list and one of the big beasts of the mining world has just made its debut.
In total, there are now six mining stocks on the ASX top 20 short-sold list. Graphite mine developer Syrah leads the way with 19.52 per cent of its shares sold short, followed by two nickel miners, Independence Group (17.87 per cent) and Western Areas (15.43 per cent), and two lithium producers, Orocobre (15.41 per cent) and Galaxy Resources (11.03 per cent).
But the surprise in the latest list of short-sold stocks puts Rio Tinto high in the rankings, and significantly higher than BHP.
The negative view of the people shorting Rio Tinto sits oddly against buy or hold recommendations by most professional analysts, including those at Intelligent Investor, who have a hold on the stock.
Rio Tinto is scheduled to file its September quarter report on Tuesday, October 17, with BHP set to file the following day. Newcrest, Australia's biggest gold miner, is due to report on October 26, along with iron ore miner Fortescue Metals.
Analysts at the investment bank Goldman Sachs are not expecting any surprises in BHP's September quarter report. Iron ore shipments have been down slightly because of the timing of shipping movements, but copper production should be up along with coal output, which is tipped to rise after a cyclone-impacted June quarter.
BHP's quarterly could be signal for a return of the activist investor, Paul Singer, who is reportedly pushing ahead with his demands for faster change at the company.
The latest indications of Singer's activity include a report that representatives of his investment fund, Elliott Management, have been visiting big BHP shareholders to press the case for dumping the company's London listing in favour of a single Australian listing.
The September quarter production report is an opening for Singer to re-emerge with a public comment on BHP ahead of the company's round of annual meetings scheduled to start in London on October 19 before moving to Melbourne on November 16.
Another investment bank, UBS, expects BHP's iron ore shipments to total 57 million tonnes in the September quarter, down slightly on the 60 million tonnes in the June quarter. Copper output is expected to have risen by 2 per cent, coal exports should be up 12 per cent, while petroleum production (oil and gas) should be 5 per cent lower.
High on the UBS watch list is Fortescue's quarterly report of Fortescue, especially the measure of “price realisation”, a number which reveals the size of the discount incurred by Fortescue for its poorer quality ore.
In the June quarter Fortescue surprised the market when it revealed a bigger-than-expected discount as Chinese steel mills demanded high quality (62 per cent iron) ore whereas Fortescue mainly produces at 58 per cent.
“The September quarter is generally a reasonable quarter for bulk commodities in Australia given it is the dry season,” UBS said.
“Although iron ore volumes for the quarter were adversely impact by port maintenance at BHP, Rio Tinto's volumes stepped up, but still appear to be running slightly below guidance of 330 million tonnes for 2017.”
Newcrest, which was hit by a shutdown at its flagship Cadia gold mine in NSW, is expected to report a small (2 per cent) decline in gold production in the September quarter which takes the year-on-year output down by 13 per cent thanks to the Cadia outage.
Of the other big mining companies Goldman Sachs believes copper and nickel producers, such as Sandfire and Western Areas, will report steady quarterly production while OZ Minerals is tipped to lift copper production marginally.