Boom is history as mining contracts

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This was published 11 years ago

Boom is history as mining contracts

By Adele Ferguson

Lower-than-expected quarterly economic growth figures that revealed the mining industry actually contracted, is another sign the mining boom is over and the Reserve Bank will need to cut interest rates again as soon as next month.

The June quarter gross domestic product figures came hours after iron ore prices fell again overnight. The price slide is casting a dark pall over those companies in the mining sector that have little or no net cash, are highly leveraged and are yet to start production.

The overall quarterly GDP growth rate more than halved on the March quarter, coming in at 0.6 per cent from a revised 1.4 per cent. On a seasonally adjusted basis, a breakdown by industries showed mining shrank 1.2 per cent for the quarter, with decreases in all subdivisions except services to mining.

In the case of Fortescue Metals Group, which yesterday announced a cut to capital expenditure, cost cuts and a deferral of its expansion program, hedge funds are lining up to short the stock, punting the world's fourth-largest iron ore miner will need to raise equity in the next few months.

In the past few days, the amount of Fortescue stock that has been shorted by investors has doubled from 7.5 per cent to almost 16 per cent.

The company's shares are down almost 10 per cent today despite announcing the sale of a power station for $US300 million.

China bears

Hedge funds are bearish on China, wagering that iron ore prices will remain below $US100 a tonne in the next six months.

They are gambling that at such prices, or lower, Fortescue will have no choice but to raise equity in the next six months - possibly as much as $2 billion - a sale that will inevitably go through at a discount.

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Investors are also looking at the list of mining companies and examining those that will need to raise equity, seek refinancing or sell assets.

Right now, Fortescue is one of their biggest targets, followed by Iluka and Alumina.

In the case of Fortescue an equity raising can't be ruled out but the company has a number of options up its sleeve before it resorts to diluting the shareholder base.

These include selling stakes in its North Star business for as much as $500 million to one of its customers. Merrill Lynch mentions in a note another option available to the company is pre-payment agreements with customers.

This issue is an interesting point as Fortescue is believed to be in deep discussions with at least two customers about entering a pre-payment contract on iron ore sales.

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If management can convince a few customers to pay up front in return for an agreement to lock-in iron ore prices at a certain price for two years, the move could raise a few hundred million dollars.

In the meantime, the spotlight will remain on China to provide a guide to what will happen next with demand for commodities. What's not in focus yet is what China plans to do to rekindle growth - and when.

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