Diversification to guard against virus impacts

MAJOR miners with a geographically diverse asset base may prove more resilient than others should COVID-19 spread to key operational hubs, RBC Capital has said in a note.
Diversification to guard against virus impacts Diversification to guard against virus impacts Diversification to guard against virus impacts Diversification to guard against virus impacts Diversification to guard against virus impacts

Port Hedland, Australia's largest bulk export port, has been identified as a potential coronavirus bottleneck

Tom Hoskyns

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"An outbreak impacting a mine could potentially see entire operations be shut or operated below full capacity, which can be economically damaging with generally high industry fixed costs," said RBC analyst Tyler Broda.

Outbreaks at key iron ore or coal ports, or at plants, could also have a significant impact on production, said the analyst.

Broda said Glencore and Anglo American's asset and country diversity "would place them in the most favourable structural position".

"Anglo American's diverse asset base across multiple countries and assets will likely provide a high level of resilience at the company level," said Broda, noting the company's assets "tend to be located in relatively disparate locations", with EBITDA most concentrated in South Africa.

"Glencore's asset base is also very well distributed with no concentration larger than about 20%. In addition, its marketing business operations tend to be decentralised," said Broda.

Broda pointed to potential bottlenecks such as coal ports at Newcastle.

"However, in general, Glencore is structurally resilient in our view," said the analyst.

Other majors with more geographically concentrated operations may be less well placed. BHP's CEO Mike Henry has spoken of his plans to split teams to allow operations to continue. Broda said ports at Port Hedland and its iron ore hubs would be potential bottlenecks.

"BHP's oil exposure especially at offshore platforms would be potentially susceptible. Escondida would also provide a concentration risk. With Australia being the dominant geographic contributor, any Australian countrywide policy or counter measure would need to be assessed," said Broda.

But though geographical diversity may not be a strong suit for BHP, Broda said it was the "clear winner for defensive exposure" and was better equipped than others to handle the potential macroeconomic fallout from the outbreak

Meanwhile, Glencore's structurally higher funding levels and lower operating margins in a recessionary environment "lead the equity to having potentially higher volatility," said Broda.