Is MIM rarely recovering?

Things certainly look more promising for MIM than they did three months ago. Since late May copper has been on a strong upswing - now up over 20% since its March 1999 12-year low. While MIM's profitability has the greatest sensitivity to copper - a 10% price change adds close to $50m to the company's bottom line – it's also well placed to benefit from recoveries in coal and zinc. As we observed in our Western Metals review last issue, zinc has gained about 20% recently and coal is also widely tipped to recover as the Asian economic crisis abates.

Not another Rio

Has this been another case of the shares running 'too far and too fast' as we suggested with BHP (issue 32) and Rio Tinto (issue 33)? Certainly, BHP has had a huge problem dealing with shareholder discontent and MIM has had much the same problem. With the book value of its shares, as at 31 December 1998, around $1.30 investors have hardly thrown caution to the wind in the recent run up.

They can, however, start to breathe a little easier. At 31 December 1988 gearing was about 82% (used to develop two new mines, Alumbrera in northern Argentina and Ernest Henry in Queensland), and was a little high for a cyclical resources company, but higher commodity prices will boost cash flow and allow gearing to decline.

But this is only half the story. Without a lower cost profile, higher commodity prices won't have the same impact on profitability. MIM has a focus on finding and developing mines, which is all very well, but sometimes at the expense of controlling costs once in production. The result is that MIM's production costs tend to be higher than those of its competitors – so much so that MIM rarely mentions production costs in its reports. The company has, however, claimed to have made progress on cost reduction since 1997.

Better times ahead

Against such a stunning share price rise, a loss that will probably be reported for the year to June 1999, is a little ironic. The reason, though, is that CEO Nick Stump, is seeking to position the company for a good 2000. Its two coal mines, Oaky Creek and Newlands-Collinsville-Abbot Point, are being expanded while, in 2000, MIM hopes to start production from the deep copper ores at Mt Isa, with the new mine to be called Enterprise.

Were it managed by a cost fanatic like Austrim's Alan Jackson, MIM would probably have a more assured future. But surviving one of the worst commodity depressions since the 1930s is no mean feat either and thankfully, the worst is probably over. Even though the share price has had a huge run, we suggest the stock can still be ACCUMULATED.