Australia | Oct 28 2010
By Greg Peel
Long as I remember the rain's been coming down
Clouds of mystery pouring confusion on the ground
Good men through the ages trying to find the sun
And I wonder, still I wonder, who'll stop the rain?
– John Fogerty (CCR)
It may not have needed confirmation, but last night the ABC weatherman confirmed a switch in the polarity of water temperatures between the eastern and western Pacific seaboards according to Bureau of Meteorology measures. Ladies and gentlemen, we are definitely in a La Nina phase. And that means a long, wet summer.
It's hardly a surprise following a drought-breaking spring which has seen thundering downpours in regional areas where small children have never known any form of precipitation. On a longer term basis it's great news for the agricultural industry. On a short term basis, it's frustrating news for the resources sector. It is a fact of life that when you dig dirty great holes in the ground, they will simply turn into swimming pools in a decent thunderstorm.
Already the wet spring has played havoc with sector production levels, as indicated from the raft of recent September quarter production reports. No particular commodity has been singled out where any form of open pit mining is involved. Stock analysts have been forced to downgrade full-year earnings forecasts for many companies, and that's before they further downgrade to account for a soaring Aussie dollar.
Managements have nevertheless tended to be optimistic. Sure – it's been a tad damp lately, they acknowledge, but it's been unusually damp and we should be able to make up for lost production in subsequent quarters. Full-year production guidance has in many cases been left untouched. Stock analysts, on the other hand, have looked skyward with some trepidation.
Macarthur Coal ((MCC)) is one case in point. Macarthur yesterday released its quarterly production report which largely met analyst expectations on the volume side given analysts had already taken note of the Big Wet in Queensland. Profit guidance was downgraded by management for the first half of FY11 but again, no surprise. What did surprise analysts was that full-year sales guidance was maintained at 5mt. Isn't that a bit ambitious as we head into a tropical wet season that might be a lot wetter than last year?
Well yes, acknowledged management, but guidance has been set assuming no major weather stoppages beyond the usual monsoonal expectations and no infrastructure problems to boot.
An interesting point, as spotted by BA-Merrill Lynch, is that the 5mt sales guidance is actually down on last year's 5.1mt. But that figure was met by running down stockpiles so this year's target figure is all about actual production growth and the replenishment of stockpiles. So if it does hose down in the Bowen Basin over the summer, there will be no stockpiles to draw upon if production is halted. Management might like to draw upon the exploits of King Canute.
It's a problem that does not seem to bother Macquarie. The other key to the FY11 success of any coal miner is the interim movement in coal prices. Macquarie is bullish on prices for Macarthur's highly sought after PCI coking coal and thus the first half downgrade in sales volume, which has impacted on MCC's share price, is seen by Macquarie as offering a valuable entry point.
Macquarie has upgraded MCC from Neutral to Outperform.
The volume/price relationship is also an interesting one. Removing the demand side of the equation as a price mover we note that supply restraint is equally a price mover. If Australian coal exports are hampered in the summer by wet weather delays then the global coal price will rise as a result. Thus what the coal miners might lose on the swings they might be able to gain on the roundabout – lower volumes at higher prices.
UBS is quick to note that monsoons are typical anyway north of the Tropic of Capricorn, but a particularly wet season may seriously disrupt supply. Now – the Hunter Valley in New South Wales has also seen some Biblical precipitation events lately, but summer monsoons are not anticipated so far south. This could well mean that if supply disruptions in Queensland push up global coal prices, and NSW sees a bit of weather but not quite as devastatingly, then NSW coal producers could do very nicely out of the situation, thank you very much.
UBS thus has a Neutral rating on Macarthur but a Buy rating on NSW-based Gloucester Coal ((GCL)).
Gloucester has also suffered a weather-impacted spring but it, too, has been able to run down stockpiles to meet sales targets. Aside from the problem of a particular frog which has carelessly found itself endangered just where GCL wants to expand its Duralie mine, and thus is holding up environmental approvals, UBS sees GCL as having the better chance of meeting full-year guidance.
Seven brokers in the FNArena database cover Macarthur and they have set a 2/3/2 Buy/Hold/Sell ratio. Only three cover Gloucester for a 2/1/0 result.
