The last six months have been a nightmare for many of Australia's largest and seemingly strongest mining companies. Shareholders have fared even worse- Santos Ltd (ASX: STO) shares have fallen 52% from a high of $15.32 to trade at $7.45, Woodside Petroleum Limited (ASX: WPL) shares are down 22%, Fortescue Metal Group (ASX: FMG) shares are down 56%, and even BHP Billiton Limited (ASX: BHP) shares have fallen 31%.
Iron Ore and Oil Price
These falls have come as a result of a dramatic fall in the price of iron ore and oil (and thus LNG). Both commodities have plunged over 50% from their 2014 highs, which is expected to dramatically impact the earnings of Australia's mining companies this financial year.
Australian Dollar
So what does the Australian Dollar have to do with all this?
Well, the quoted iron ore and oil price that the media use are US Dollar amounts. The value of one Australian Dollar has fallen as much as 27% from a record high of US$1.11 in 2011 to today's value of around US$0.81.
This implies that at an iron ore price of US$80 per tonne, the value in Australian Dollars for one tonne sold has varied from AUD$72.10 at US$1.11 to today's price of AUS$98.77. The same is true for oil, and the biggest impact will be on those companies with the majority of costs in Australian dollars too.
Winners and Losers
The biggest 'winners', or the ones most likely to benefit from the lower Australian dollar, are the companies with mines in Australia (obviously) and those with lower relative US dollar denominated debt levels.
This means that companies like Fortescue, which has a relatively massive amount of US dollar denominated debt, is unlikely to benefit much from the lower Australian dollar as Fortescue now needs more Australian dollar profit to clear the interest repayments.
I believe we'll see that the major mining companies with the lowest cost mines, namely BHP, Woodside, and Rio Tinto Limited (ASX: RIO) as the major beneficiaries.
