Today’s Blog – Wednesday 3rd August 2016

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The Australian outback mining town of Kalgoorlie is currently hosting the annual mining industry shindig known as “Diggers and Dealers”.

And judging by media reports this week – the boom is back!  We have stories of French Champagne fuelled functions; the scoffing of lobster and oysters; Chairmen of company pushing the lever to show how explosions work; even, shock horror, talk from Rio about supporting exploration (and no doubt there are some other colourful stories that are not suitable for family newspapers….).

Meanwhile over in the Oil Patch we can’t see how black the sky is as it is currently obscured by oil-men throwing themselves out of windows.

Why the difference between the two main parts of the resources sector?

  • Minerals entered the slump before oil (we remember explaining to investors – and believing – why oil was “different” than that other boring stuff).
  • The two hottest sectors of the mining patch just now are gold and the new energy metals such as lithium.  The former is uncorrelated with pretty much anything else – and indeed benefits from current economic stresses.
  • The latter plays to trends in the energy sector which people can readily observe – electric cars, renewables driving the need for energy storage, etc.  (The gas sector serves the latter as well – arguably much better than batteries will for a decade – but is not telling the story).
  • Australia’s mining sector contains the largest and best companies in the world – its energy sector does not come within a mile of the same category.  Enthusiasm and dollars from the top therefore has much further to travel in the latter.

Commodity prices

Un-noticed by the champagne quaffing Diggers, the price of oil continues to slump.  Brent was down ~1% to US$41.96 and WTI crashed through US$40 to close at US$39.51.

The weekly BHI inventory “numbers” were poor – a build in crude of 1.7 mmbbls and an increase in gasoline of 0.5 mmbbls (partially offset by a distillate reduction of 0.8 mmbbls).

In addition to yesterday’s reported record Saudi production, Russia has also just hit new production records (and is still ahead of the KSA).

Henry Hub was down ~1% to US$2.74.

LNG and international gas

The Wall Street Journal has reported that Petronas is likely to soon confirm what we have suspected for some time – that it will defer FID on its British Columbian hosted LNG project.

This is the largest and arguably most mature LNG project in Canada and would seem to signal that any LNG coming out of the country is probably fading into the latter half of the next decade.

And news in the category of “who would have thought it” – a Yemen LNG spokesman has recently announced there will be further delays in the resumption of their supplies.  The sound of explosions and gun-fire could – at least metaphorically – be heard in the background.

Company news- Beach Energy (BPT)

BPT announced today that it had sold some very late life oil assets in the Queensland Cooper Basin to Bridgeport Energy (a wholly owned subsidiary of coal company New Hope Corporation).

The sum was not disclosed as it was “confidential”.  (Cynics – not us! – might say that that is ASX-announcement-speak for “low”).

Bridgeport has assets in the same region – and crucially has enough balance sheet muscle behind it to satisfy the regulator (and BPT) that it can manage the large abandonment liabilities associated with the assets.

Company news – Energy Australia (EA)

China Light and Power (CLP) subsidiary and energy utility EA was the subject of some speculation in today’s press about a revisiting of plans of a few years ago to IPO it on the ASX.

The outcome of the current sale process of PE owned Alinta Energy will be closely watched by CLP and if positive could give this a green light.  Second tier utility assets are of much more interest than oil and gas at present.

Quote of the day

As noted above, gold is doing well in the current world of interest rates that are lower than at any time in recorded history.  Respected US Fund Manager Jeremy Grantham recently described this situation as follows:

“In a way never seen before, our financial establishments are driving interest rates toward zero and beyond. How will this end? I think of these political, social, and financial experiments as Black Hole Experiments in which the further we push them, the more the laws of physics, finance, or politics begin to change in unknowable ways.”



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