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More impairments likely for resources sector

Based on the latest report by Wilson HTM Investment Group, 54 out of 110 resources companies listed on the ASX are currently trading significantly below their carrying net asset value, which will likely prompt a number of asset impairment announcements throughout the sector.

Lower commodity prices, diminished global demand and an increase in resource supplies have resulted in enormous losses on most of the resources companies over the last 12 months or so. Newcrest Mining (ASX: NCM), for instance, has fallen 61% since last September, despite having regained 21% over the last three days. The company recently wrote off around $6 billion in assets, largely onset by gold’s fall from grace (the metal has fallen to US$1,285 per ounce – a 28% fall since October) and higher mining costs.

Similarly, mining heavyweight Rio Tinto (ASX: RIO) wrote down $15.5 billion in assets earlier this year, relating to its Mozambique coal operations and its aluminum business. As seen with Newcrest, the impairments are causing enormous pressure to company balance sheets, which Wilson HTM highlighted could result in higher gearing levels and some companies potentially “breaching debt covenants at the corporate level” for those in significant debt.

According to The Australian Financial Review, the report revealed six companies that maintained high levels of debt and were at risk of impairments: Arrium (ASX: ARI), Discovery Metals (ASX: DML), Galaxy Resources (ASX: GXY), Mirabela Nickel (ASX: MBN), Nexus Energy (ASX: NXS) and Paladin Energy (ASX:PDN).

Whilst the group does see some value emanating from various resources companies, it recommends that company executives increase their focus on shareholder returns, whilst also showing greater investment discipline. This is something that Rio Tinto and BHP Billiton (ASX: BHP) have promised to focus on, with both announcing plans to significantly cut costs over coming years, divest in non-core assets and increase dividend amounts.

Foolish takeaway

Most companies in the resources sector are trading at heavily discounted prices compared to 12 or more months ago. Whilst this does offer investors an opportunity to add them to their portfolio, volatility and short-term trading will likely cause these companies to fall further. However, with the mining boom well and truly a thing of the past, investors may be wise to wait for companies’ annual reports to be released before making a judgment on their future potential.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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