Deloitte WA Index remains flat despite growing concerns over Australia’s energy and resources sectorDOWNLOAD
7 September 2012: Despite growing fears of an economic slowdown and a longer than expected period of lower iron ore prices, the market capitalisation of WA listed companies which comprise the Deloitte WA Index increased 0.2% during August to AU$140.0bn.
Iron ore prices continued to fall during the month, decreasing 22.8% to US$90.30 per metric tonne, due largely to concerns surrounding an economic slowdown in China. The decrease in the iron ore prices has resulted in the cancellation or postponement of a number of large capital projects across the resources sector, resulting in speculation as to the state of the “mining boom”.
Deloitte’s National Mining Leader, Tim Richards noted “the continued uncertainty over the long term growth of China and significant reduction in iron ore prices over the past 12 months has resulted in the shelving of large scale capital expansions and the slowing of planned expansion programs. There is a new sense of caution that is likely to remain for the rest of the calendar year."
However, economic data released during August suggests that although firms have downgraded their capital spending plans for 2012/13, spending could still be up to 90% higher than it was five years ago. Reduced capital spending frees up large amounts of resources (including financial and skilled labour) which may be better applied in cost reduction and efficiency improving processes. Further, what the market should see is supply and demand pressures returning to a more balanced level, and iron ore stabilising at more long-term sustainable prices.
“Whilst this will hurt the bottom line significantly, this will force Australian miners and businesses to improve productivity,” Mr Richards said.
With the exception of iron ore, the majority of surveyed commodities experienced strong price growth during August, with precious metals leading the way. Silver was up 13.5%, gold 4.8%, whilst platinum, tin and oil all experienced near double-digit growth on the back of supply-side concerns.
In terms of the global markets, the US S&P 500 was up 1.1% during August with further quantitative easing likely. Focus will increasingly be on the Presidential Race and its potential impact on the market. The Nikkei was up 3.3%, although industrial production indicators were below analysts’ expectations.
The FTSE 100 grew 1.3%, however sentiment remains weak and uncertainty continues in the Eurozone. The likelihood of a Greek exit is mounting as it continues to struggle to meet its debt and cost reduction obligations. Spain’s largest domestic region, Catalonia, requested more than AU$6bn in emergency funding from the national government, on top of the AU$122bn that Spain has already borrowed from the Eurozone bailout fund to assist its banking system, therefore driving fears that a full sovereign bailout maybe required.
Allaying speculation that the Western Australian “mining boom” is over, many stocks performed well during the month of August. The movers and shakers for the month were Sirius Resources NL, Integra Mining Ltd and Base Resources Ltd, who increased their market capitalisation by 207.1%, 49.2% and 40.7% respectively.
Sirius Resources NL (Sirius) is a junior explorer focused primarily on gold, nickel sulphide and other base metals, with operations in Australia and Canada. The last two months have seen Sirius’ share price increase remarkably, from AU$0.05 at 30 June, to AU$0.51 at 31 July, and reaching a high of AU$1.41 at 31 August 2012. This monumental growth resulted from the announcement of significant nickel and copper sulphide mineralisation at the company’s 70% owned Fraser Range project in WA (the Nova discovery). Sirius also completed a share placement to institutional and sophisticated investors in August, raising AU$7.6m in order to help the company fast track drilling from the Nova discovery. This raising, combined with the increased share price and an exercise of 8,372,500 unlisted share options throughout the month raised a further AU$5m. This has resulted in the company’s market capitalisation increasing from AU$78m to AU$239m during August.
Integra Mining Ltd (Integra) is engaged in the exploration and mining of gold and other precious metals in WA and enjoyed an increase in its share price following a takeover offer from rival gold producer Silver Lake Resources Ltd. For the month ended 31 August 2012, Integra’s market capitalisation increased 49.2% to close at AU$439m.
Base Resources Ltd (Base) is a resources developer with a portfolio of assets in Africa and Australia. Development funding incorporating both debt and equity amounting to AU$170m was secured earlier in the year to assist in the development of its world-class Kwale Mineral Sands Project in Kenya. Base’s market capitalisation closed the month 40.7% higher at AU$191m.
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