The combination of the oil price war triggered by the underlying, ongoing dispute between Russia and Saudi Arabia and pressures on commodity prices from the global spread of coronavirus are creating an unprecedented international crisis that unsettles the Natural Resources sector – not just the oil and gas companies but mining companies too.
Current oil prices today are below the $30 per barrel and some oil traders expect prices to continue to fall within the next few months. As a result, global oil and gas exploration and production investments are expected to fall considerably. In addition, staffing and supply shortages for key services and the provision of key equipment may delay the delivery of projects further. Conversely, however, with the cancellation of projects due to uncertainty around the availability of funding, any companies which were fully funded or had cash on balance sheet, may see an opportunity to secure better rates in the services market and bring projects on line under budget.
Gold companies may benefit from an increased commodity price as a result of people looking to securitise their funds into the classic, historic security that is gold. If you look at the current trends in the gold price the commodity has already started to tick back up but commentators are now starting to note that gold prices may rally further.Traditionally investing in gold has seen many as the way to ride out the peaks and troughs of the sector space.
Regarding the impact on commodity miners, those mining for battery metals and gemstones may have a different angle on the impact of CV-19,than just pricing considerations. A lot of mines are located in remote, relatively undeveloped areas of the world where medical supplies and access to hospitals are severely limited. Mining can also be a labour intensive business with many workers either coming from local areas or flying in and flying out on shift patterns. With the speed of the spread of the virus many mining companies are swiftly taking measures to lock down their operations and increase their onsite medical support. Likewise restrictions on travel is hampering the fly in and fly out workers and operational changes are under review already.
The capital markets will make up their own mind about the sector in time but the shorter term requirement for access to funds, for some, will become even more of a challenge than it already was.
To mitigate risk factors facing the sector, natural resources companies will need to cut costs, re-forecast capital projects over the shorter term and likely longer term too, implement revisions to logistics, review their contracts for the application of provisions covering extraordinary circumstances and supply chain operational provisions, and, to determine when to speak to lenders / debt providers to deal with marginal or breached covenants – not just about the short term but about the longer term too.
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