Mining investors bracing for a grim reporting season as Evolution and OZ Minerals join downgrade list
The mining sector has been warning of labour shortages and rising costs for more than a year. That grim picture is now hitting home for investors.
Resources investors who bought into a bull market are bracing for a grim reporting season after Evolution Mining and OZ Minerals joined a growing list of miners disclosing cost and production issues.
A raft of ASX-listed mining companies hit 12-month lows on Monday amid a growing sense the July quarterly reporting season will see a downgrade bloodbath.
In addition to Evolution and OZ Minerals, gold and base metals miners including Northern Star Resources – the ASX’s second-biggest gold producer – Gold Road Resources, 29Metals, Ramelius Resources and Regis Resources all touched their lowest marks in a year on Monday.
While sagging commodity prices have undermined the listed resources sector in recent weeks, Monday’s sell-off was prompted by the growing realisation skills shortages and cost inflation – flagged by the industry for at least the past year – are painting a grim picture for full-year returns.
Northern Star is likely to join the dismal procession when it updates investors on its expansion plans for the Super Pit mine on Tuesday, after Evolution and OZ Minerals were smashed on their news of cost and production downgrades. With the midpoint of the year days away, OZ Minerals said it expected its production costs to surge by 17 per cent for the calendar year, with cost inflation of about 8 per cent combining with lower output guidance to deliver an outsized impact on the Adelaide-based miner. OZ Minerals said production from its flagship Australian mines was likely to be lower than previous expectations due to the combination of bad weather, Covid absenteeism, unplanned outages and rising costs.
Production at its Carrapateena mine in South Australia’s Far North is expected to be about 13 per cent lower than previously forecast, at 55,000-61,000 tonnes of copper, while the group copper production guidance has been lowered from 127,000-149,000 tonnes to 120,000-135,000 tonnes.
Its full year forecast for all-in sustaining costs has increased from US135c-US155c per pound of copper to US160c-US180c.
But more concerning than the immediate impact to June quarter production reports, and the financial reporting season to follow in August, are signals from Evolution that problems with input costs and skilled labour are likely to baked in for years to come.
While Evolution said it expected its June quarter group production to lift 15 per cent from a poor March period, the company downgraded full-financial year output guidance by 6 per cent to “around 640,000 ounces” of gold.
That is largely the result of the impact of Covid-19 in Western Australia, where the virus spread quickly after the state opened its borders in March. Evolution said more than 30 per cent of the 500-strong workforce at its Mungari operations, near Kalgoorlie in WA, were absent for more than 7 days in the June quarter.
But of more concern is the downgrade to Evolution’s medium-term production outlook, as the company struggles to turn its Red Lake mine in Canada – bought for $US375m ($550m) in 2019 – into an operation that matches the performance of its Australian assets.
A year ago Evolution boss Jake Klein told shareholders the company expected to be producing 880,000 and 950,000 ounces in the year ending June 30, 2024, after output of 680,788 ounces in the 2020-21 financial year. The steady ramp-up was premised on a turnaround at Red Lake and an expansion at Cowal in NSW.
But Evolution now says its work to transform Red Lake is a year behind schedule.
The downgrades from Evolution and OZ Minerals are the latest in a raft of announcements within the mining sector in June.
Mid-tier WA gold producer Ramelius Resources also recently downgraded full-year output guidance, citing bad weather, rising costs and the effects of the pandemic on its workforce.
Shares in St Barbara were battered last week when it deferred a long-planned expansion to the Simberi gold mine in Papua New Guinea, citing rising costs, and warned of a permitting problem at its Canadian operations that could see them mothballed this year.
Shaw and Partners analyst Peter O’Connor said he expected to see further downgrades from Australian miners before the end of June, as companies opted for “confession season” ahead of formal quarterly reports in July.
In a client note on Monday Mr O’Connor said he believed the probability of further downgrades this week was “high”.
“Feels like we have not seen the end of this cathartic process,” he said in a client note on Monday.
“The confessions are coming thick and fast. The scorecard now reads five of the top 50 miners have confessed. Expect more with four trading days left ahead of June quarter updates.”
Evolution shares closed down 74c, or 21.9 per cent, to $2.64. Oz Minerals was off 73c to $18.46, with Northern Star Resources down 96c, or 12.1 per cent, to $7.02 ahead of its investor update on Tuesday.
