Australian miners still spending but jitters hit shares

SYDNEY Thu Aug 30, 2012 5:54am EDT

A woman gestures in front of a BHP Billiton sign during a half-year results briefing by the company's Chief Executive Marius Kloppers, in central Sydney February 16, 2011. REUTERS/Tim Wimborne

A woman gestures in front of a BHP Billiton sign during a half-year results briefing by the company's Chief Executive Marius Kloppers, in central Sydney February 16, 2011.

Credit: Reuters/Tim Wimborne

SYDNEY (Reuters) - A record pipeline of investment in Australia's resources sector failed to soothe investor concerns that the end of a decade-long boom is nigh, amid warnings of an industry in flux and as mining stocks tumbled along with commodity prices.

Drilling contractor Boart Longyear (BLY.AX) bore the brunt of investor concerns - its shares dived by more than a third on Thursday after it slashed its full-year profit forecast, blaming an expected slowdown in global mining activity.

"Uncertainties ... are driving our mining customers to be more cautious with their capital," Boart Longyear Chief Executive Craig Kipp said.

Sharp price falls in key commodities including iron ore and coal, combined with well-publicized delays to some proposed mining projects from miners including BHP Billiton (BHP.AX) (BLT.L), have led to talk Australia's resource boom was dead and buried.

Most industry participants have poured cold water on such predictions, arguing the rapid and prolonged urbanization of China in particular will continue to drive strong demand for industrial minerals.

"We've been selling everything we can produce," said Nev Power, chief executive of Fortescue Metals Group (FMG.AX), Australia's third largest iron ore miner behind Rio Tinto (RIO.AX) (RIO.L) and BHP and dependent on sales to China for most of its revenue.

"Currently we're booked up for our sales through September and into October as well," Power said. "Likewise, none of our customers are having difficulty raising LCs (letters of credit)."

Data released by the Australian government on Thursday appeared to support those views.

Led by the resources sector, planned business capital spending for 2012/13 rose to a record A$181.5 billion ($187 billion), equal to no less than 13 percent of Australia's A$1.4 trillion annual gross domestic product (GDP). Capex growth of 3.4 percent in the second quarter topped forecasts.

"The mining boom is not over," said Stephen Walters, chief economist at JPMorgan. "We've had some commodity price weakness so the price side of the boom is weakening but the investment side still looks very solid."

Still, the upward revision to the investment pipeline was less than earlier revisions, pointing to a slowing in the red-hot pace of spending that prompted some caution from economists for the longer-term outlook.

"At the start of mining booms you get surprised by how strong capex plans are and in the end, you get surprised by how quickly they go down," said Matthew Johnson, interest rate strategist at UBS. "The risk is they keep dropping but it's too early to tell."

COMMODITY PRICES SLIDE

The Reserve Bank of Australia expects mining investment to peak at about 9 percent of GDP over the next two years before fading and being at least partly replaced by a rise in exports as a $270 billion pipeline of projects starts coming on stream.

However, the sharp fall in commodity prices that has rattled markets is showing no signs of abating, with benchmark iron ore prices down for a 10th straight day on Wednesday to their lowest in almost three years. <IRONORE/>

Fortescue's Power predicted the sharp decline in iron ore prices would end within a couple of months before a recovery to a floor price around $120 per tonne.

Power also said he expected to see China's steel production fall and a reduction in iron ore stockpiles as low prices force higher cost Chinese iron ore producers to cut output.

"We haven't seen too much production reduction at this stage," he told the Sydney Mining Club. "I would expect to see that come off a little bit more.

A senior official at China's Baoshan Iron and Steel Co Ltd, meanwhile, said global demand for iron ore would not grow and could even drop in the second half of 2012 compared with the first six months, with supply also rising.

"It's definitely a different part of the commodity cycle than we've been in," said Steven Robinson, senior investment manager at fund manager Alleron. "The (iron ore) price has fallen quite rapidly, so the uncertainty as to where it is going to end up is what's causing the market concern right now."

Rio Tinto (RIO.AX) (RIO.L), the world's No.2 iron ore miner, fell below A$50 a share for the first time in more than three years, while smaller rival Atlas Iron (AGO.AX) and iron ore developer Sundance (SDL.AX) each shed about 5 percent after iron ore prices dropped to close to $90 a tonne.

Fortescue's Power said he was confident the iron ore price would rebound to $120 a tonne level in the next month or two after stockpiles of ore in Chinese ports and steel mills were exhausted.

(Reporting by Wayne Cole and James Regan in Sydney and; Sonali Paul and Miranda Maxwell in Melbourne; Editing by Alex Richardson)

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