Miners soar thanks to iron ore: Reporting season roundup
Miners bask in the glow of iron ore prices while bargains remain in coal.
Lewis Jackson: The Australian resource sector has paid out billions in dividends, as it rides a global boom in commodity prices. I'm joined by Morningstar's Mat Hodge to discuss how Australia's miners went this earnings season.
Mat, thanks for being here.
Mat Hodge: Pleasure.
Jackson: Let's start with the sector level. What were the highlights this earnings season?
Hodge: Yeah, I think probably the results were strong generally. And I guess, as you would expect, particularly for the iron ore miners, I mean, they are really basking in the glow of that price. I mean, you know, BHP still probably hasn't peaked yet in terms of its earnings, because it's a June year end, whereas Rio Tinto was just the half. So it's more reflected the stronger prices they've had, but there's still more to kind of flow through. In the second half, there's a bit of a lag, and we saw that with the likes of Whitehaven as well. They haven't necessarily, the companies haven't necessarily fully benefited from the high prices that we've seen, yet. So I think there's still probably a little bit more to come either in the next financial year or the next half. But as you've seen, there's quite some volatility in the price of these commodities. And China has kind of shifted its focus a little bit to reducing its carbon output and steel production has come off a little bit. And we've seen the iron ore price react to that. So we are seeing volatility, but generally, that's from a very high-level ticket, if you take the case of iron ore.
Jackson: You mentioned BHP (ASX: BHP), it's been in the news following the the merger of its oil division with Woodside and collapsing of the dual listing structure. But what did you think about its end of year report?
Hodge: Yeah, I think, generally, they're doing pretty well. Like I was saying, I think there's probably a little bit more to come for them in the next financial year, because they didn't really benefit fully from that period of elevated iron ore prices, I think the outlook is probably stronger. But if you step back, and you look at the kind of returns that this business is making, particularly their iron ore division, they are very, very strong. I mean, we're back above kind of, like China boom FY11 levels. So that's the context of where we are. So you look at the stocks and you look at the the PEs and the high single digits and the yields look very fat, but you got to keep in mind, these are off kind of peak earnings, right? So, don't expect that to repeat year in and year out, because that's certainly not going to be the case. Right. And I don't know when that's going to end but I think it's fair to say we are above cycle peaks and probably well above cycle peaks, sorry, above cycle average in terms of earnings and commodity prices and closer to a peak.
Hodge: Yeah, I think where iron ore is the primary driver, that's the case and probably copper is probably in a similar position, some of the other commodities less so. I mean, you look at coal, it's only really been, if you take coking coal, it's only really been in the last three to six months where the prices have really kind of taken off and it has taken off. And thermal coal has been kind of coming a bit longer, but it still hasn't really flowed through to earnings and in a big way yet. So those stocks are primed to do significantly better in the next financial year than the one that's just gone.
Jackson: And looking beyond the big miners like Rio and BHP, were there any unexpected surprises or highlights the other names you cover? You touched on coal just there?
Hodge: Yeah, so I think I mean, Whitehaven (ASX: WHC) is one that we've thought has been undervalued for some time. And I think it's worth talking about. They haven't seen much, much benefit from those higher coal prices yet. But if you look forward, I think they generated close to $200 million of cash flow in the first couple of months of this financial year. So there really is a lot of earnings and cash flow power kind of pent up in that business. And I think we're going to see that play out over the coming financial year. Iluka (ASX: ILU) was one where the recovery in mineral sands demand and prices has surprised on the upside. I mean, the company has had a few issues in terms of its operation in Sierra Leone. But, with some supply disruption from Rio Tinto and Rio Tinto is the number one producer of titanium feedstock and number two in zircon, with supply disruptions to their main mine in South Africa. You know, there is potential for a kind of a supply side shock scenario. So Iluka is really well placed to meet that strong demand post COVID that we're seeing now. So I think that's probably the one that was called out that was quite a bit better and the outlooks quite a bit better than what we had kind of factored in before.
Jackson: So with earnings seasons now wrapping up for those of us who don't listen to as many earnings calls as yourself, was there anything interesting or unexpected on a call this season?
Hodge: It's really hard for me to pull something out to be honest, you get to the end of reporting season and the whole thing is pretty much a blur. I mean, I think in some pockets we're seeing, you know, return to kind of cost inflation and I think that's probably most acute in in Western Australian iron ore. And that's not really to be surprised about because it just is, it has been so good over there for so long and obviously with COVID border restrictions that's layering on a bit of extra cost as well. So you do tend to see a pickup in inflation as the cycle drags on and it has started dragging on. But yeah, like in terms of surprises, I think you know, just in terms of probably the outlook for Iluka and the fact that they bring more supply and that looks pretty likely. That's probably the call out on the upside I would say.