Project capex may slide 40% in 2009/10, Citigroup says

Sales of operating equipment could fall 50% over the next two years as mining companies concentrate on capital preservation, working capital and share buy-backs, according to a new report from Citi Investment Research, a division of Citigroup Global Markets.

Citi analysts expect project capex could be cut by about 40% in 2009/2010, a stark reversal from the years of the mining and construction capex boom that began in 2002. (During the last six years, mining and construction equipment suppliers posted total cumulative volume growth of more than 110%, Citi says.)

The fall-out for mining equipment manufacturers such as Atlas Copco, Metso, Sandvik and the Weir Group, may be significant, they warn.

“Whilst the longer-term fundamentals remain intact the risks could lead to more pronounced delays in capital spending that could last for two years.”

The analysts also note that with defined reserves in the mining sector of about 28 years nearly twice the average reserve life for the oil industry “mining companies could put capex plans on hold and switch to share buy-backs.”

Management can get better returns from share buy-backs (at an internal rate of return of 18%) rather than with Greenfield developments (at an internal rate of return of 10%), the research division estimates.

In the last week of Oct., Vale made public that it would buy back 4.5% of its outstanding shares.

“The company could buy back 15-20% of its shares for the cost of the estimated 2009 capex budget, which is currently being planned at US$14.2 billion for 2009 compared to US$11 billion in 2008,” the report states.