Just when you thought the resources boom was behind us, Australian mining companies delivered their best year ever in 2016, exporting $13.4 billion worth of resources according to The Australian newspaper. This eclipsed the previous record of $12.4 billion set in 2013, at a time when resource prices were much higher.
Aussie miners used the tough years in 2014 and 2015 as a learning experience in using weak prices to reform their operations. This resulted in lower costs, more efficiencies and less labour-intensive operations. Fortescue Metals Group Limited (ASX: FMG) went from a marginal producer sinking under a mountain of debt to Australia's lowest-cost mining producer – and its shares are up 300% in the past 12 months.
Fortescue has shown how higher resource prices can result in booming profits and cash flows to produce rocketing share prices. Here are two miners I think are in the best position to benefit from a 2017 mining boom:
BHP Billiton Limited (ASX: BHP)
Average analyst forecasts expect BHP to deliver US$1.38 in earnings per share, or approximately A$1.80. That would value BHP at around 15 times its full-year earnings.
However, what many investors don't realise is that the prices BHP has earned for its products over the past year are substantially below the 'spot' or market prices. In its half-year operational review (released in January), BHP reported average realised prices of US$45/barrel for oil, US$55/tonne for iron ore, and US$2.41/tonne for copper.
Spot prices have been substantially higher in recent months at around US$53/barrel for oil (+17%), US$80/tonne for iron ore (+45%), and US$2.60/tonne for copper (+8%), according to data from Nasdaq and The Metal Bulletin. If sustained, the higher prices should lead to significantly improved cash flows and BHP has flagged a $1.4 billion reduction in capital expenditure in the 2017 financial year to result in a further cash bonanza.
This mega-miner has already done the hard yards of improving efficiency and trimming headcount so now investors stand to benefit from bigger dividends. Add in the potential for share buybacks as earnings increase to make BHP one of my top mining picks for 2017.
Galaxy Resources Limited (ASX: GXY)
A more speculative investment than BHP, Galaxy Resources' main near-term attraction is the spodumene (lithium) mine at Mt Cattlin in Australia, which recently commenced production. It has guaranteed pricing and loan agreements already in place so it's well funded to hit its target of 160 kilotonnes of spodumene production in 2017.
In the near term, Galaxy stands to benefit from improving the level of recovery from its processing plant (a low-cost way of lifting production) as well as renegotiation of sale prices after 2017. Already Galaxy has been able to exceed the 6% lithium purity threshold that earns the maximum price of US$905/tonne under current sale arrangements.
Over the medium term Galaxy's lithium brine prospects at Sal de Vida in Argentina also have promise, with an estimated 40 year resource life and around three-year payback on the required capital expenditure. Near term I think it's tough for Australian investors to get a read on the Argentine economy – one of the reasons lithium miner Orocobre Limited (ASX: ORE) didn't make this list – but over the medium term Galaxy should have a good chance of getting an attractive investment outcome from this project.
Overall, Galaxy Resources has set itself up for a strong 2017 as it has the guaranteed demand for its output at fixed prices and attractive upside from its Argentinian prospects.
