Miners in the crosshairs of higher power prices: Macquarie

By Market Index
Fri 10 Jun 22, 3:10pm (AEDT)

Key Points

  • Macquarie attributes rising costs to increased demand, rising fuel costs and unplanned coal generator outages
  • Ongoing supply issues for AGL
  • Further price increases expected

After taking stock of the current East Coast power crisis, Macquarie flags copper miner Oz Minerals (ASX: OZL), and gold miners Aurelia Metals (ASX: AMI),Newcrest ASX: NCM) and Evolution (ASX: EVN) as having highest earnings risk exposure to runaway electricity prices.

The broker’s assessment follows revelations by the Australian Electricity Market Operator that the average wholesale electricity prices rose a whopping 141% on-year to $87/MWh in first quarter FY22.

While wholesale electricity spot prices in Victoria averaged $367 per megawatt hour last week - five times the average for the first quarter - NSW and QLD were at $475 MWh and $447MWh respectively.

More cost pressures ahead

Management at South32 (ASX: S32) recently advised investors to expect more “upward pressure” on costs in the months ahead.

Northern Star (ASX: NST) has also advise the market that the cost of producing gold in the year to June would be up to 8% higher than previously expected.

Then there's QLD coal miner Coronado (ASX: CRN) which also noted the need to reduce unit costs over the next eight months, if it’s going to keep its commitment to maintaining unit costs between $US69 and $US71 per tonne in 2022.

Cost pressures are by no means limited to Australian miners, with many European refiners and smelters of metals like zinc, nickel and aluminium having to reduce production recently in response to extremely high energy prices.

Diesel hit

However, gold, copper and coal miners aren’t the only resource stocks in the eye of higher costs.

Macquarie suspects rising diesel prices will also negatively hit the large-scale iron ore operations of Fortescue Metals (ASX: FMG), BHP (ASX: BHP), and Rio Tinto (ASX: RIO).

While less exposed, some coal miners are also expected to feel the impact of higher prices.

“Rising costs were driven by a combination of increased demand, rising fuel costs and unplanned coal generator outages,” Macquarie says.

Reduced supply compounds energy crisis

Concerns flagged by Macquarie over ongoing cost pressures to miners operating on the East Coast, coincide with revelations of festering supply issues for AGL Energy (ASX: AGL).

The energy giant’s shares were down -1.48% in early morning trade following management’s confirmation it could take an additional eight weeks to fix a breakdown at its Loy Yang facility in Victoria.

While AGL can recover the cost of the last breakdown at Loy Yang ($100m) on insurance, management notes the company no longer has that cover.

Bad timing

Adding insult to injury, outages have come at a time of spiralling power prices.

Meantime, to make matters worse, AGL has also lost further capacity at the giant Bayswater coal plant in the NSW’s Hunter Valley.

With three units now out of action, the power station responsible for supplying electricity to 2m Australian households is now operating on 25% capacity.

While the AGL’s share price nudged lower today, it’s worth noting that the share price is up 40% in 2022.

AGL share price over 12 months.


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Market Index

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