Assessing The Varanus Island Gas Explosion

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            [7] => ((TAP))
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This story features ILUKA RESOURCES LIMITED, and other companies.
For more info SHARE ANALYSIS: ILU
The company is included in ASX200, ASX300 and ALL-ORDS

By Chris Shaw

With energy prices high on the back of a tight market the last thing mining companies need is a disruption to the supply needed to power their operations, but this is the reality facing a number of Australian resources companies following an explosion at Varanus Island off the coast of Dampier in Western Australia.

The explosion was reported yesterday by operator Apache and brokers have been quick to assess what the impact could be on companies that take their gas supplies from the Harriet joint venture, the issue being no-one at present knows just how long any disruptions could last.

Deutsche Bank notes the explosion has the potential to cut as much as 30% of Western Australia’s gas supply, particularly as it could take as long as several weeks for operations to get back to normal levels. This has the potential to have a significant impact on earnings for those companies supplied by the JV. GSJB Were estimates a five day shutdown could cut 1.5-3.5% from earnings for companies such as Iluka ((ILU)), Aditya Birla ((ABY)) and Minara ((MRE)).

On the plus side the broker points out insurance should offset some of these losses, but as Macquarie notes securing alternative supplies is likely to impact on costs as gas from alternative sources is likely to be more expensive and those able to shift to diesel for their power needs such as Newcrest ((NCM)) and Oxiana ((OXR)) have limited supplies and will also face higher costs given diesel is more expensive than gas.

The broker sees Minara and Iluka as suffering the most, Minara because all its output comes from Murrin Murrin and Iluka given any lost production will have a large proportional impact on what are already low earnings forecasts.

Deutsche agrees Iluka is likely to suffer, noting it has already moved to shut-down some production and its costs of production will now be higher, though as Merrill Lynch notes annual production should not be impacted based on initial assessments of the impact of the lost supply.

Credit Suisse sees scope for some impact on Alumina’s ((AWC)) earnings as well given the higher costs of sourcing gas elsewhere, the broker noting this will impact on already squeezed margins. It also suggests Aditya Birla ((ABY)) may lose some production given its Nifty mine relies solely on gas for its power needs.

Tap Oil ((TAP)), with a 12.22% stake in the joint venture is also likely to see some earnings pressure from the disruption to operations but as GSJB Were points out its earnings base is already low so the impact is not so significant.

Brokers have not yet adjusted earnings forecasts as the extent of the disruption to gas supplies remains unknown.

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