Top Gainer: Murchison Metals (MMX)
Well, it has certainly been a rollercoaster week for MMX shareholders. Shares plunged 20% on Monday only to recover just 1.5% lower, followed by a 23.3% plunge on Tuesday. Wednesday saw a reversal in fortunes as the market digested the news from earlier in the week, with MMX being the day’s top gainer, surging 14.8%. However brokers are starting to change their recommendation on the stock, with Citi downgrading MMX to a sell following the release of a feasibility study for its Oakajee Port and Rail project.
MMX hit the market with several pieces of bad news this week, shuffling its senior management and revealing a massive cost blowout at the Oakajee port and rail project in WA. The management shake-up saw the executive chairman stepping down, the chief executive becoming chief operating officer and a new CEO being brought in.
Bigger news is the cost blow-out and funding issues. The Perth-based miner admitted that it faced serious financing challenges to meet its funding commitments, and is struggling to secure loans. It will even consider selling its flagship iron ore mine to pay for the over-budget and late Oakajee port and rail development.
Independent analyst Peter Strachan said Murchison would most likely reduce its 50 per cent interest in Oakajee Port and Rail (OPR), its joint venture company with Japan’s Mitsubishi. “The company has already moved down the path of selling some or all of its interest in OPR,” Strachan said. Strachan pointed out that Murchison was a small company and couldn’t finance half of a $6 billion project on its own.
The cost blowout was revealed in a feasibility study for the infrastructure development showing a 24 per cent cost increase to $5.9 billion, along with a blowout for its Jack Hills mine expansion in the Mid-West. This compares to an estimate of $5.24 billion in November and an original costing of $3 billion in March 2009. The combined projects will cost a whopping $10bn.
The future of Oakajee had already come under a cloud last month when state-owned Chinese group and would-be Oakajee customer Sinosteel mothballed its $2 billion Weld Range iron ore project.
Incoming CEO Greg Martin told a teleconference that the miner would consider all options to fund the Oakajee project, north of Geraldton in Western Australia, including selling its $3.7 billion Jack Hills iron ore project. “There is no doubt that Murchison finds itself in a very challenging environment,” said Martin, a former AGL Energy chief. “All options are on the table for consideration as part of this process … nothing is sacred or sacrosanct.”
Despite the cost blowout, Martin says Oakajee’s costs compare favourably with other infrastructure projects and he was confident it would attract investors. Meanwhile WA Premier Colin Barnett says he expects Chinese parties will be interested in a stake in Oakajee. Martin said Chinese entities had already invested $3 billion to $4 billion in the region, and it was logical for the Oakajee development to proceed.
Mr Martin said he would spend the next fortnight on the road asking for funding from the WA government, Mitsubishi and other possible investors and he will also try to repair relations with Sinosteel – which said the delays were costing it $100 million a year – and other foundation customers.
The WA and federal governments have already committed a combined $678 million to the port but WA Premier Barnett has consistently ruled out the state government increasing its $339 million contribution. Mr Barnett has described Oakajee, one of Australia’s largest infrastructure projects, as the state’s most important development for the next 50 years as it would open up a second major iron ore province, behind the Pilbara. This now appears to be under a cloud.
Based on Thomson Reuters data, 20% of analysts have a buy on MBN, 80% have a hold, 0% have a sell.
Chart: Share price over the year to 06/07/2011 versus ASX200 (XJO)
Stock code: MMX
Charts: Murchison Metals Limited
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Investor Centre: Murchison Metals Limited
Biggest Loser: Adelaide Brighton (ABC)
Adelaide Brighton, a supplier of cement and lime to the construction, engineering and infrastructure and resource sectors in Australia with 1,600 employees, was today’s biggest loser, dropping 3.5% on the back of a price target reduction by UBS.
While it maintained a Buy recommendation, UBS reduced its price target from $3.70 to $3.35 and stated that it preferred exposure to CSR and BLD in the sector. UBS expects weakness in housing to continue over the next six months and its forecasts and price targets right across the sector have been lowered.
And housing has indeed been slowing, with a whiff of a more serious drop in the air. Consumer confidence and spending is down; and there is a tiny glimmer of evidence our exploding home prices are flattening and in a few areas, even decreasing.
In fact, the latest RP Data home value index shows a 2.7% decrease in housing prices in the first five months of 2011. Additionally sales volumes in real estate were about 25% below the five-year average, while the number of listings was up 25% on last year. All ominous signs. “Despite the low rate of unemployment and the strength of the resources sector, it is clear that the average Australian is content to pay-down debt and wait for some economic certainty to return,” RP Data research director Tim Lawless said.
Housing slowdown aside, ABC’s bottom line is also at threat from the proposed carbon tax. Subject to parliamentary approval, the Labour/Greens government’s proposed two-stage plan for a carbon price mechanism will commence this year. The plan is for a flat price to apply for three to five years, before moving to a market traded price.
Elaine Prior analyst with Citi estimates that it is heavy industry that is most exposed to a carbon tax. She expects the biggest carbon impacts to be on companies like Adelaide Brighton, accounting for a reduction of 3.3 per cent of net profit in full year 2013.
The magnitude of any carbon tax depends on both the cost-per-tonne, and the level of compensation that trade-exposed industries receive. Much of the devil will be in the policy detail, notably around the level of free permits to “emissions intensive trade exposed” industry (EITEs) like steel, cement and aluminium, since prices are set on international markets. According to a recent analysis of power supply contracts, the energy market is pricing in a 50 per cent chance that a carbon price will not be in place by the middle of next year as planned.
Based on Thomson Reuters data, four analysts have a buy on ABC, three have an outperform and eight have a hold.
Chart: Share price over the year to 06/07/2011 versus ASX200 (XJO)
Stock code: ABC
Charts: Adelaide Brighton Limited
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Investor Centre: Adelaide Brighton Limited
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