Small miners face uncertainty
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Christine St Anne is Morningtar's online editor.
Small mining companies are without a doubt coming under pressure as the big miners feel the pinch. The week again saw a number of big miners announce both job losses and mine closures.
Xstrata said it will cut 600 jobs and the BHP Billiton (BHP) Mitsubishi Alliance said it will shut down its coal mine in central Queensland.
As expected, falling commodity prices, higher operational costs and a high Australian dollar were the key factors behind these decisions. These same factors will also undoubtedly hit the smaller end of the resources sector.
Morningstar senior resources analyst Mathew Hodge says the smaller mining companies are particularly captive to investor sentiment and this makes it difficult for them to grow their business.
"The problem with the really small companies in the (resources) market is that they rely on capital raising and that is based on sentiment. It is difficult to get investor support given many investors today are invested in cash and income securities," Hodge says.
The ability to sustain a business is made even more difficult given falling commodity prices.
"If you are not in production and have not got the earnings, the outlook is not great. Your future viability is dependent on factors like commodity prices that are outside your control," Hodge says.
Hodge says small miners that are on the higher side of the cost curve, have weak balance sheets, have margins under pressure and a high capital spend face a difficult future.
"If they tick all those boxes ... well," he says.
The small end of the listed resources sector is part of the hunting ground for small-cap fund managers. A number of these managers acknowledge the sector faces its fair share of challenges.
"My view on the small-cap resources sector is not as colourful as other sectors. In reality, half of the small-cap resource companies are not in production. When commodity prices come off, this will make it difficult for those companies to enter production," Celeste Funds Management investment analyst Scott Armstrong says.
However, Armstrong emphasises the outlook for the smaller miners is not just clouded because of commodity prices and the decisions made by the big miners. It is also an issue of funding.
"The key issue regarding the outlook for that sector is that it is difficult for these companies to get funding. The ability for them to enter production has been diminished," he says.
These small-cap resource stocks are also captive to geopolitical risks. According to Armstrong, half of the listed small resource companies in Australia have operations in other countries.