Point of view: Evaluatingthe mining cycleThe mining cycle can be...

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