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The consensus view right now is that all companies in the mining industry are struggling because of high costs and falling commodity prices. This isn’t entirely true.
Take Amec PLC, the giant resource project management and consulting firm. In its latest financials, the U.K.based company reported a 37% jump in year-over-year revenue, along with a 25% rise in diluted earnings per share. And in Australia, mining services firms made headlines this week by reporting their best results.
“The order book has been maintained at record levels. We see continued demand for our services, and this has not been significantly impacted by the ongoing economic uncertainty,” Amec said.
Those results from a major industry services firm are a total disconnect from mining companies themselves. Over the past several weeks, miners have reported significant drops in profit, deferrals of key projects, and firings of chief executives who failed to boost the stock prices.
The turbulent earnings season wrapped up this week when BHP Billiton Ltd. mothballed the Olympic Dam expansion in Australia, the world’s biggest open-pit mining project, because the investment return just isn’t good enough. The move symbolized everything wrong with an industry that can’t control costs and capitalize on metal prices that – despite falling well off their highs – remain healthy by historic standards.
As cost inflation runs higher, the big losers have been the shareholders of mining companies. The winners have been the employees, consultants, equipment manufacturers, construction firms, and numerous other contractors invoicing the industry (though their margins are being squeezed by cost pressures as well).
“The service providers have made out like bandits, whether it’s on the mining side or the oil and gas side,” said fund manager John Stephenson of First Asset Investment Management.
The unusual disconnect is not likely to last, experts said. Either costs have to moderate or commodity prices have to rise, to bring the market back into balance. Otherwise, largescale projects will not go forward and supply shortages are possible, barring a big drop in demand.
Ironically, shareholders seem perfectly happy with the idea of companies deferring or cancelling mines instead of building them. They are fed up with the status quo of rising costs and weaker margins, and have been urging miners to return capital to them instead of plowing it into highrisk projects.
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