Point of view: Evaluating the mining cycle The mining cycle can be thought of as having three distinct phases: exploration/planning, investment/construction and production/consumption. During mining cycle slowdowns production activity will continue to be maintained as a priority over exploration and construction activity. Mining companies will seek to continue to extract value from the revenue producing production phases of the operation whilst seeking to curtail the longer term investment expenditure phases of exploration and construction. How are the phases distinguished? The exploration/planning phase is a period of strategic investment and is treated as discretionary depending on organisational priorities. Exploration and planning is undertaken over a long time horizon, up to 10-15 years. The longer time horizon means that companies can save on costs by cutting exploration activity in the short term, before reinstituting exploration activity at an appropriate future date with only a relatively small impact on the overall timing of the project. The investment/construction phase is a period which may also be associated with a decline due to one or a combination of any of the factors outlined below. �� The company may find it harder to secure finance for new projects. The sharp fall in demand and commodity prices could lead to the project being deemed marginal or uneconomic. �� Companies will preferentially reduce the amount of greenfield (undeveloped/new) projects due to the long lead times typically associated with these projects before they become revenue producing. Where expansion is required, companies will typically look to expanding brownfield (existing) operations. The production phase is when the company is able to repay the debt that has been used to fund the project. So what does this mean for mining services companies? In CommSec’s view, companies exposed to the production phase of the mining cycle are at a lower risk of curtailment than those exposed to the exploration and investment / construction cycles. Cassandra Meagher, Senior Industrials Analyst
CXG Price at posting:
15.6¢ Sentiment: Sell Disclosure: Not Held
