Resources boom to end with a bang

Mining investment dropping rapidly

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published November 27, 2013 2:16 pm AEDT

The resources boom could end with a bang, according to data released today by the Bureau of Resources and Energy Economics (BREE).

71 projects in the planning stages of the investment pipeline have been delayed by a year, or more, in the past six months. Given commodity prices, market conditions, and the capital issues of Australia's mining companies, many are also highly unlikely to proceed at all. BREE warned in May this year that investment in the resources sector could fall by as much as two-thirds over the next five years. Major miners such as BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) have cut back their non-core expansion plans, and are instead focusing on their core operations.

The value of projects at the feasibility stage has dropped by $24 billion to $208 billion, a big fall in just six months. BREE expects the value of committed projects to decline rapidly, although much of that is due to the completion of several mega-LNG projects in the next few years.

Minerals exploration expenditure has declined by 24% to just $3.1 billion in 2012-13, with falls across all mineral commodities. Coal and base metals projects recorded the largest declines, decreasing by 36% and 31% respectively. Iron ore and gold exploration investment were down 14% and 16% respectively. Partially offsetting those falls was the 47% rise in petroleum exploration expenditure to $4.9 billion, the highest level ever recorded.

But the mineral exploration expenditure falls could be a major concern. Mines generally take several years to progress from feasibility to production. But without significant exploration, replenishing existing mineral reserves will be difficult, and could see Australia struggle when the cycle swings back into high demand for resources again.

High value iron ore projects, including Aquila Resources (ASX: AQA) West Pilbara and Grange Resources (ASX: GRR) Southdown Magnetite project, have stalled and it's unclear whether they will proceed any time soon. The main issue for these two projects is not the iron ore price, but a lack of export infrastructure, including railways, ports and their associated infrastructure.

Foolish takeaway

It means more pain is coming for the mining services companies. As we have warned several times, some could go bust under a worst case scenario. Now is not the time to be looking for bargains in that sector.

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