Mining services providers’ earnings will fall as miners facing slower demand and profit growth cut costs, said Scott Hobart of HFZ Capital Management Ltd., which invests in commodities futures and stocks.
Occupancy of temporary housing operated by third-party services companies is “crumbling” as mining companies reduce reliance on outside contractors as a key avenue of cost-cutting, said Hobart, a Hong Kong-based fund manager. Large mining firms have built thousands of rooms for workers, sometimes next to services-company facilities they previously used, he added.
Hobart’s forecast contrasts with U.S. investors including Jana Partners LLC and Greenlight Capital Inc., which have invested in mining-housing provider Oil States International Inc. Jana has spoken with the management of Oil States about separating the well-site services unit and creating a real estate investment trust for the housing business, a federal filing by the New York-based asset manager showed.
Some providers of temporary mining accommodation are “probably an example of the most extreme mispricing that we can find in our market today,” Hobart said.
He yesterday declined to say whether HFZ has bets on Oil States, citing a policy of not specifying investments by its funds. He initially made the comments during the Karen Leung Memorial Investor Conference on June 6.
Australian mining companies are cutting costs after earnings collapsed in the last 18 months as China’s demand for resources moderates. Mining and energy projects worth about A$150 billion ($141 billion) have been delayed or canceled in the past year in Australia as investments peaked and commodity prices declined, the Bureau of Resources and Energy Economics said in a report May 22.
“A number of operators that supply into the mining sector have yet to fully appreciate the consequences of this change of strategy,” Hobart said, referring to miners shifting focus on cost-cutting instead of increasing output.
HFZ manages the Hong Feng Zheng Fund, which invests across commodity futures and equities using its understanding of the physical commodity markets. It is part-owned by metals-focused investment company Red Kite Management Ltd., which manages $3.3 billion, according to the website of unit RK Mine Finance.
Shares of Oil States, which provides housing for workers in the Australian mining regions, Canadian oil-sands projects and some parts of the U.S., have risen 20 percent from April 29, when Jana disclosed a 9.1 percent stake.
Greenlight bought $220.2 million of Oil States shares in the first quarter, the New York-based manager said in a filing with the Securities and Exchange Commission last month.
Companies brought in large numbers of contractors and non-permanent employees to undertake small tasks within their mines to help boost near-term output, Hobart said. Most of the capital expenditure-related construction work was also done by those temporary workers, he added.
Miners relied on temporary accommodation operated by services companies because they were unable to provide enough housing for the workers themselves, Hobart said. The cost of renting one room in a remote area in Australia’s Queensland state jumped almost fivefold over seven years to A$120 a night at the height of the boom last year, said Hobart.
Cost of production in the northern Queensland mines of BHP Billiton Ltd., the world’s largest mining company, rose almost fourfold over seven years to $161 per ton in 2012.
“That growth at all costs strategy has failed to deliver and failed to deliver in a pretty stunning way,” Hobart said.