Tread carefully with resources

Countryman

During the past couple of weeks some of Australia's major resources companies have announced record numbers with their June quarter production reports.

Rio Tinto reported flat iron ore output for the June quarter from a year ago and said it was on track to hit a rate of 283 million tonnes a year by the end of 2013, despite concerns over slowing growth in China.

Hard coking coal output increased by 13 per cent and mined copper output rose 5 per cent year-to-year. The company indicated that even with a deterioration in global economic conditions in the second quarter, its expansion projects were still viable.

Fortescue Metals Group (FMG) shipped a record 17.8 million tonnes in the second quarter 2012 but it was overshadowed by a forecast $600 million increase in capital expenditure and the possible need for more debt (in the order of US$1 billion).

This put pressure on its stock price, although FMG was confident that continued production growth should see the debt raised and the company continue on its way to reaching its predicted 155 million tonnes production by the end of 2013.

BHP's report, although setting new production records, was only just above most analysts' forecasts and consequently the share price improved only marginally when announced. Copper, iron ore and coal were slightly ahead of expectations, while petroleum was a slight disappointment.

Consolidation seemed to be the focus in this quarter with major growth and expansion expecting to deliver results in the future.

Woodside Petroleum (WPL) surprised on the upside with much-awaited positive results from the Pluto LNG Plant.

The company recorded a 43 per cent increase in production compared to the previous quarter, due to the successful start up of Pluto. The stock rose nearly 8 per cent in one trading session on the news.

Chief executive Peter Coleman said the quarter saw improved production from the foundation business on top of the better than expected Pluto results and that the company's balance sheet had been strengthened by the sale of WPL's minority portion of the Browse LNG project.

With these results out in the open, investors now have a much clearer picture on how our resource giants are tracking. Present results are reassuring but with the global economic climate so weak, the resource sector's outlook is uncertain at best and investors will need to tread carefully.

·If you would like to subscribe to Adam Farrall's weekly market update, contact him at Sentinel Stockbroking on 08 9225 0020 or email afarrall@sentinelgroup.com.au

_Information contained in this article does not consider your personal circumstances. You should consult a stockbroking professional before making any investment decisions. Sentinel may hold positions in stocks discussed from time to time. _

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