- Extremely high capital risk tied to maintaining current commodities prices. I posted a chart in another thread about the parabolic increase in mining capex in the last 10 years, which has accelerated even faster in the last 2 years. All of that investment is based on current return-on-investment numbers that assume current commodity prices will be maintained or reverse direction and climb again. The risk here is that commodity prices will continue to decline (as China goes through a recession mild or severe), and the return on capital will be impaired, and that has numerous knock-on effects such as cost cutting, declining employment in the sector, declining equity and so on. If the price of iron ore drops to USD100/ton, Fortescue will no longer be able to service their debt.
Where do these mining companies raise their capital? Anyone have any data on that?
Question kind of hit me when I was looking at total private debt in oz vs USA where the big difference was in corporate debt - Australia is much lower.
Seems like it would be a mixture of equity and bonds, which most of the bonds in USD given that these companies get their income in USD, and also since A1 30-year corporate bonds in USD are around 6% yield (?) vs. 7%+ in AUD...
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
Where do these mining companies raise their capital? Anyone have any data on that?
Question kind of hit me when I was looking at total private debt in oz vs USA where the big difference was in corporate debt - Australia is much lower.
Seems like it would be a mixture of equity and bonds, which most of the bonds in USD given that these companies get their income in USD, and also since A1 30-year corporate bonds in USD are around 6% yield (?) vs. 7%+ in AUD...
It is a mix of equity and bonds, and US capital markets are commonly the source. I would find it surprising if the bulk of Australian mining companies were considered A1. BHP and Rio perhaps (commercial paper rates for BHP are between 5.5 and 6.5 for senior unsecured notes). Fortescue recently sold senior unsecured notes in Australian capital markets, not sure what the rate was, but I imagine it is in the 5-6% range.
For a funding rate of 6%, and a gross margin of 40%, you would expect a minimum 15% return on capital, but to ensure no cashflow impairment, 20% return on capital would be the safer operating return. How the hell do you generate an IRR of 20% on digging dirt out of the ground? It's absurd.
The only way it can possibly work is if the price of dirt continues to rise. And that can only happen as long as no additional supply comes online or demand continues to grow. The likelihood of the former is almost 100%, and the likelihood of the latter is currently looking less than 50%. Both together means that in the future miners cannot service their debt and stay liquid.
Another of the big systemic risks in the smaller miners is that they all own each others' shares. So if one goes down, all of their balance sheets are impaired.
It is a mix of equity and bonds, and US capital markets are commonly the source. I would find it surprising if the bulk of Australian mining companies were considered A1. BHP and Rio perhaps (commercial paper rates for BHP are between 5.5 and 6.5 for senior unsecured notes). Fortescue recently sold senior unsecured notes in Australian capital markets, not sure what the rate was, but I imagine it is in the 5-6% range.
I looked up Rio and BHP and they were A3 and A1 respectively. Expect it goes downhill form there.
But the question I am interested in is, what is the big 4 banks' exposure to mining companies? Who holds all that paper?
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
Rating agency Moody's sees no immediate threat to Australia's triple-A rating from tumbling commodity prices that have prompted some miners to scrap planned investments and cut output.
Prices for iron ore and coal, Australia's two largest exports, have fallen sharply in recent weeks, raising concerns about the impact on Australia's terms of trade and tax revenues if the slump is prolonged.
"We are very comfortable with Australia's triple-A ratings because of the government's very low debt levels compared with other sovereigns in the triple A category," Steven Hess, a senior vice-president at Moody's in New York, said.
The resource-rich country is one of just 10 nations with a top-notch rating and stable outlook from Moody's.
To the envy of many Western nations, Australia's net debt is expected to be 9.2 per cent of gross domestic product in 2012-13, a fraction of that of Japan or Europe.
Mr Hess said risks stemming from a slowdown in China, falling commodity prices and uncertainty in Europe and the United States were manageable in the context of low government debt.
Recent falls in commodity prices will affect national income, terms of trade and potentially government finances, but will not lead to any real crisis.
Strong government finances combined with solid banking institutions and a stable political framework mean Australia is highly likely to keep its triple-A ratings in the foreseeable future, ratings agency Moody's says.
The resource-rich nation enjoys one of the world's lowest ratios of gross debt to domestic product at 22.1 per cent in 2011. The United States, UK, Germany and France all have debt levels exceeding 80 per cent.
Also helping is a robust economic growth of 3.7 per cent in the second quarter, compared with a recession in Europe.
"We are very comfortable with Australia's government finances and economics," said New York-based Steven Hess, a senior credit analyst for Moody's on Wednesday, during an annual visit to the region.
Australia is one of just eight countries with a top notch rating and stable outlook by Moody's, while another eight nations have a triple-A rating but a negative outlook.
Australia must get its budget into surplus by 2014 to help avoid revision of its AAA credit rating, warns the global director of pubic finance at Standard & Poor’s Financial Services.
If there’s a sustained delay in returning the balance to surplus, as the economy gathers momentum and as people start spending again, as the import demand picks up and current account blows out, we might not see the government’s fiscal position as being strong enough to offset weaknesses on the external side and that’s what worries us.
Australia’s already, as we see it, got some credit metrics that are right off the scale when it comes to assessing Australia’s external position.
It’s got high levels of external liabilities, it’s got very weak external liquidity and that basically means the banks are very highly indebted compared to their peers.
For us, we look to Spain, which was Australia’s closest peer four or five years ago in terms of having a very strong fiscal position, very similar to what Australia has at the moment, its external position was weaker, like Australia’s, and it got routed very quickly.
The government needed to provide support to the banks, it had to shore up growth in the economy and its debt levels more than doubled.
PUBLISHED: 15 Nov 2012 18:10:59 | UPDATED: 16 Nov 2012 02:58:20
Australian banks have dismissed comments from ratings agency Standard & Poor’s comparing the country’s banking system to Spain’s.
“You need to ask the S&P guy why he feels the need to deliver a stronger message,” said Australian Bankers Association chief executive Steven Münchenberg. “If it’s an attempt to raise the heat I don’t know why they’d do it. I certainly don’t think the Spanish experience is particularly enlightening to the issues we’ve got here
Spain clearly had a housing bubble in the run-up to 2008. The big difference in Australia is that the housing boom wasn’t met with a construction boom. We’ve got the opposite problem – various figures say we don’t build enough houses.”
we look to Spain, which was Australia’s closest peer four or five years ago in terms of having a very strong fiscal position, very similar to what Australia has at the moment, its external position was weaker, like Australia’s, and it got routed very quickly
Spain had a massive residential construction boom leaving an unprecedented overhang of housing stock.
Spain can't set its own interest rates and can't issue its own currency.
Published 8:55 PM, 15 Nov 2012 Last update 6:25 AM, 16 Nov 2012
Prime Minister Julia Gillard has used an annual dinner for business leaders to again promote the role of Asia in Australia's future, saying the region holds the key to the country's future success, while also asking business leaders to give her government some credit for Australia's AAA credit rating and investments.
Speaking at the annual dinner of the Australian Business Council in Sydney, Ms Gillard said that whatever else the next century ushered in, Asia's rise was a certainty.
The government's white paper, Australia in the Asian Century, released last month, was a plan to make the global shift "work for us", she said.
"Not because we are standing on a burning platform, but because we face unprecedented opportunity," she told the dinner on Thursday night.
Ms Gillard said business engagement in the region played a vital part in ensuring the success of the government's plan and called on those gathered to look to Asia.
"Think about the connections which emerge when we use APEC to drive further deregulation in our region, when we use the Business Advisory Forum and COAG to streamline environmental regulation ... or when we lift school standards," she said.
"These are genuine and clever deployments of all the elements of national power to achieve a national goal, success in Asia."
Ms Gillard acknowledged that some of the policies outlined in the paper, such as the NBN and pricing carbon, had been "controversial".
But she said this was a hallmark of Labor government and "the policies which get us ready for Asia come from Labor governments".
By 2015, Ms Gillard said, China should take its pilot emissions trading scheme national and carbon markets would involve billions of consumers this decade.
"In total around 60 per cent of the world's GDP is either subject to a carbon price today, or has one legislated or planned for implementation in the two or three years ahead.
"This is a time when complacency equals defeat, when political negativity must be met by disdain from thoughtful people," she said.
"This is a time when you only win if you do the work, when you only succeed if you shape your own future."
She went on to urge business leaders to give her government credit for its achievements in a difficult economic environment, according to The Australian Financial Review.
"Take away the politics, look at what the market is saying about us," Ms Gillard said, according to the AFR. "Australia's budget is one of the seven economic wonders of the modern world."
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