Roxby Downs - Food for thought.

Discussion in 'Where to Buy' started by angel investor, 16th Oct, 2014.

  1. angel investor

    angel investor Member

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    Roxby Downs - food for thought.

    Since BHPs announcement in 2012 that they would put the Olympic Dam expansion "on hold", the market in Roxby has taken a big hit.

    Things spiraled as there were plenty of negative commentary/spin and ill-informed headlines in the media. Speculation from the punters was rife ("expansion canned", "pulled", "closing!?!")? everyone was understandably spooked and investors fleed.

    The correction (and headlines) hit Roxby hard.

    BHP went from building around 20% more new houses in Roxby Downs to accommodate the anticipated influx of workforce for their BIG BANG expansion prior to the announcement. After the announcement, around 200+ jobs were axed from Olympic Dam.

    Much more houses, much less people.

    For property prices, it was a double whammy:
    1. a massive loss of confidence (speculation ?will BHP pull out all together & close the mine?!?!);
    2. a huge inequity in the supply demand ratio

    The number of rental properties in the market increased 6 fold, from 22 to 118. The average rental price for a 3B1B house dropped from $650/w to $300/w.

    Property sale prices dropped 30%+. The turnover of house sales almost stopped. Properties that used to fetch $500k are now worth around $350k.

    Investors are a large portion of property sales in Roxby. If they are interested, everything turns (and quickly), if not, everything stalls and quickly.


    Two years later and where is Roxby at?
    Given the poor yield equation at the moment and the perceived lack of certainty from BHP, investors are sitting on the sidelines, or looking elsewhere.

    The supply/demand ratio has improved signifcantly (but quietly):
    o Number of properties on the rental market have gone from a high of 118 houses available in Roxby now down to around 50. There has been a 50% decline in rental house in less than 9 months. Once this hits sub 30, things will get very interesting.
    o Falling rental prices finally plateud a few months ago and we are now starting to see a slight up kick of plus 5-10% in the past month.
    o BHP recently announced record quarterly results in Olympic Dam with more production than ever before at lower costs. The mine productivity gains have been strong.
    o BHP announce they will be including Olympic Dam in their main tier 1 company (not pushing it into the NEWCO group for lower priority mines).
    o In Aug 2014, BHP announce they have found a new approach to mine the Olympic Dam ore (heaped leaching) which enables them to stage an expansion and maximise the output from the ore (keep in mind that the $30b expansion spooked all major BHP shareholders... too high risk for such high cost... this is a scalable shareholder solution)
    o Aust Government fast track approvals BHP request to conduct larger scale heaped leaching trials at Olympic Dam to commence in 2016. No EIS required.
    o More jobs are slowly coming back (which is resulting in the reduction in avail rentals).
    o Banks stopped lending money for home purchases in Roxby but now the purse strings have loosened slightly. Once more certain announcements are made this will loosen further.


    Investing in Roxby... the future of house prices and yields?

    If history is anything to go by, once the available rentals in the market drop below 25, the supply/demand effect will start translating into rental price increases. Yields will be on a strong improve, with real possibility of achieving short term cashflow positive investments.

    But what about the likelihood of capital gains longer term? Investors will likely want to have more certainty about BHP longer term plans before they get off the sideline.

    This may be coming

    BHP is holding its annual general meeting in Adelaide on 20 November 2014. This is the first time in many years BHP have held it in Adelaide.
    2013 Perth
    2012 Sydney
    2011 Melbourne
    2010 Perth
    2009 Brisbane
    2008 Melbourne
    (I couldnt find any record before this date)

    There is likely a reason for this.

    BHP will likely provide more updates about its plans regarding Olympic Dam. Infact, Andrew Mackenzie mentioned this would be the case.

    Even if this is simply to say they are planning a gradual expansion post the new heaped leaching trial (albeit much slower), this will be very positive on the market. Any plan will provide more certainty, then no plan. With this comes more positive headlines, greater investor awareness, more jobs and more confidence in the market.

    Investors will have more confidence to invest for not only yields but also longer term capital gains.

    Watch this space.
     
    Last edited: 16th Oct, 2014
  2. D.T.

    D.T. Property Lookerafterer

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    I think its in for a very rocky ride
     
  3. DaveM

    DaveM KFC Buyers Agent

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    The market there has taken a licking
     
  4. pinkboy

    pinkboy SS Lookerafterer

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    First post.

    Pretty good ramp if you ask me.


    pinkboy
     
  5. angel investor

    angel investor Member

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    Pinkboy - Please let me know if any of the points presented above are false - i would be happy to discuss. Not sure its reaonable to think that someone with 1 or 1700 posts makes them more or less relevant or credible as you imply

    Yes, Roxby has taken a licking & it is a high risk/reward proposition, but it is worth while shining some light on both sides of the story.
     
    Last edited: 16th Oct, 2014
  6. Waldo

    Waldo Rock Analyst

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    Right, here we go.

    Dont forget about the large number of new camp rooms that was also constructed as part of the pre-approval spending. This has resulted in the majority of contractors moving from single dwellings back into the work camps.


    Correct - rental numbers are coming down sharply. However I believe one of the local REA was also quoted as saying although rentals are coming down, they aren't actually going to people new to the town. Rather its people who already lived in town who decided with the new affordable rental prices, they could afford their own place (rather than a sharehouse).

    Correct - record production I believe. However I would be very hesitant to draw any conclusions from this (hint - do some more research).

    Newco is not for the lower priority mines, but rather the smaller scale ones. Some of the Newco mines are actually some of the most profitable, but BHP would rather focus on the large scale ore deposits - of which Olympic Dam is one of them (plus the other copper assests are significant). As an example, BHP will not be de-merging the nickel west mines, even though they are some of the most unprofitable in the portfolio.

    So they are looking at a smaller scale way of mining? Do you have any data on what this actually consists of? I'd have thought that investors would be looking for known large expansions, not "they may expand, just it will be small"?

    Data to back this up? My personal opinion is rather contradictory.

    Any reason to think what/when these 'certain' announcements will be?



    I would not read too much into this Adelaide AGM. My understanding is with weak comodity prices in other areas, available capital is limited.


    Overall - for the high risk taker who is heavily contrarian, yes Roxby might be the place to sink your capital into. For everyone else? Well people can make up their own mind.

    Angel - I thought I'd ask, any personal interest in the area?
     
  7. angel investor

    angel investor Member

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    Hi Waldo, thanks for your constructive discussion.

    I have followed the BHP, Olympic Dam (OD), Roxby Downs equation very closely (daily) for the last 15+ years. I lived in Roxby for 10 years, left in 2005 but still have many friends there, visit at times and still know every REA. I own a portfolio of properties with several in most states. One of my properties is from Roxby. I purchased the Roxby in the early 2000s (as a home back then) for half the price you get them for now. Hopefully that helps your understanding of where I come from. Does it make me biased or well informed? My aim is the latter. That is why I am asking for others to feel free to contribute to the discussion.

    For the past two years it has all been one sided discussion and it is easy to get caught up in the crowd behavior on Roxby.

    I genuinely believe that the fundamentals of the Roxby equation have changed and taken a major underlying shift in the past 6 months and most people are not aware. Hence my time in writing this post food for thought.

    Does this mean everyone should think about investing? Of course not.

    Too often people chime in with comments like good ramp, taking a licking or rocky road or other comments from the sidelines but add nothing of substance.

    I think it is worth getting more sides to the discussion on the table on this and as you say, letting other decide for themselves. Due dilliegence is key in any investment.

    I advise caution. It is def a high risk/reward option as it stands today. Not for first time investor (at the moment) but definitely worth considering for medium to larger sized investors who are looking for ways to improve their serviceability. I would also agree this is also a contrarians dream as it stands. Mining towns can be rocky with big swings down and up, they can provide big returns for astute investors with eyes on longer term fundamentals (or the opposite!).

    Important points:
    1. if/when available rentals in Roxby hit sub 25, prices will start increasing (this is looking likely soon)
    2. If BHP provide more certainty about a plan, more awareness/headlines = more investor discussion/debate/confidence will return (this is looking likely to some degree in 20 Nov)
    These are my opinions based on what I know.

    Here I go with some more food for thought (and responses to your points):
    a) History is a good indicator: In 1999 when the incline was complete, the same thing happened with market flooded with rentals and prices tumbled. When vacant rates dropped downs, price and rent went up. In around 2008 when the shaft was closed for repairs for a 3+ months same thing happened. Typical minig town cycles.
    b) <quote>All the town needs now is 40-50 new families and it will be full. Also it can just take a few people from onsite camps to move into town to be full. <end quote> REA quote august 2014 (Raine & Horne)
    c) Waldo: in regards to record production rates and you point about (hint ? check the details) Please state what you elude to knowing on this. I have reviewed the notes from BHPs EOFY operational review release around Aug and note the following quotes: Tangible positive outcomes with a number of all time record production results. Smelter improvement programme should have a long lasting impact on results - BHP Olympic Dam Asset President, Darryle Cuzzubbo. (nevertheless, this point is not that important to bigger picture)
    d) Waldo: RE investors needing big scale project. I dont agree. In fact investors need a smaller scalable path (that shareholder will approve) for this 200 year ore body to be unlocked in the current commodity cycle. Once prices recover, then expansion/shareholder approvals will accelerate fatser. The mega project path for OD was a MAJOR stumbling block for BHP. BHP were spooked from major shareholder back in 2011 who were stating publicly (ref: BlackRock investments CEO comments on both Inside Business ABC progam & in Financial Review in 2011) "capital intensive megaprojects were not the right decision for shareholder". The short term focus of shareholders played a very important in OD expansion "on hold". It was too big for BHP to risk short term shareprice drops for a long term plan that required $30b investment upfront. This is the challenge with publicly listed company devleoping massive project and more so when the markets are shaky. This def spook the BHP board and Kloppers. Hence back to the drawing board to look for a scalable shareholder solution to unlock the world class ore body. Klopper backflipped and started saying (quote)less capital intensive option that will require a technological breakthrough. He also stated that heaped leaching trial in lab were being conducted as one possible solutions back in 2012.
    e) Fast forward 2 years and now heaped leaching trial have been stated as a success in lab trials and moving to demo plant on 15+ hectares on site at OD. Construction to start 2015 with 36month trial. This is considered and has been stated by CEO Mackenzie as the possible breakthrough they are hoping for. It will enable incremental staged growth as Cuzzubbo puts it (head of OD). This will appease shareholders. It will also remove associated risk of uranium as acid leaching separates uranium from copper/gold/silver very early in process.
    f) Whilst OD is the worlds largest know uranium ore body, people often confuse it as a uranium mine. Uranium only currently makes up less than 20% revenue. OD is a copper mine. This play is all about copper for BHP (uranium is just a bonus if price recovers). Copper is a major priority for BHP and expect to be next valuable resuource as China moves away from industrial to consumerable economy (move fro iron ore to copper). Known Copper reserves are very limited and % grade quality will continue to delcine sharply in next few years. BHP will pounce on OD when the copper prices changes.
    g) Bliateral civil nuclear co-op agreement between Aust & India for uranium exports in August is an important development for BHP. Taken many many years to sign but now done. (nice bonus)
    h) Andrew Mackenzie (BHP CEO) knows OD very well. He used to head up the operations. His public comments have been very measured but still very favourable. <quote> World class ore body. unlock the potential in best way for shareholders.
    i) Investment is still moving in the town (albeit slower):
    i) The town is about to make major investment in Richardson Place precint redevelopment
    ii) Macmahon Holdings recently deployed the wolrds most powerful drilling rig (a monster in size) to OD to drill more into the mine.

    Anyhow, just my 2 bobs worth.

    If I has to invest in a mining town I would much prefer this scenario than Karratha (Iron Ore) or Moornbah/Bowen (coal).

    Summary my view is it is not a matter of "if", but "when". Copper commodity price will play a big part here. BHP will likely start slow to appease state and federal politics of situation (all these trials etc). Then make much faster progress when prices move.

    Watch what Mackenzie says on 20 November for signals AND watch rentals available in market closely.
     
    Last edited: 17th Oct, 2014
    knightm likes this.
  8. kskyring

    kskyring Member

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    Thanks Angel -Interesting post. Will follow with interest.

    I looked at Roxby around 8 years back but bought elsewhere. Could probably buy now at rock bottom though - and it is still the same massive ore body that will surely get developed sooner or later.

    What are other peoples thoughts about this?

    If BHP announce something of more substance in November and properties drop below 25 in market would Roxby be worth considering?

    How would you compare Roxby's potential versus other mining towns?
     
  9. TMNT

    TMNT Member

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    hey angel investor, can you do a spruike of coober pedy,

    I heard there are great yields out there!
     
  10. strongy1986

    strongy1986 Member

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    It is the second largest producing mine in the world - uranium
    An expansion would make it the biggest - by a long way

    It might be only 20% of revenue because the uranium price has been so low
     
  11. strongy1986

    strongy1986 Member

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    Yeah there are

    But try finding someone to do maintenance on your property

    Not worth it in my opinion as rents are still quite low , $150 - 200 a week

    A few call outs a year would cook your return
     
  12. knightm

    knightm Member

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    Indeed it is a very big ore body.

    It will still be primarily a copper mine and the uranium, gold, silver etc are the cream on top. Bhp need a solid projection over the coming decade of good solid copper prices and improving uranium prices to move forward on it all.
     
  13. Waldo

    Waldo Rock Analyst

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    Significant growth in rental rates in the town are not going to occur until both the housing stock in town is taken up AND the camps get full.

    Remembering that even during boom times when capacity in town was literally zero (houses + camps), the yields where still very low for a mining town (and the associated risk).

    Yes 100%, its been a huge year with production & cost savings. PM me if you want more information I guess.
    Correct - I would see an investment in Roxby as a gamble on the copper price.

    An interesting technical feat indeed (I believe it may even be the first hole that the particular model has drilled). Its the largest of raise drills - defintely not a monster though. However I'm not sure how this ties into property prices?
     
  14. angel investor

    angel investor Member

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    Thanks waldo. Agree on all fronts but to a lesser degree on ur first point Most families I know living in Roxby wouldnt consider living in the camps.
     
  15. kskyring

    kskyring Member

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    If Waldo is right and roxby downs is a bet on copper, what are people's thoughts on the future of copper prices? Copper price is Struggling at moment but how about medium term?
     
  16. Waldo

    Waldo Rock Analyst

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    Don't get me wrong, Angel presents lots of decent data, but at the end of the day the mines (and expansions) profitability it reliant on the copper price.

    For me its too speculative, but for the counter cyclical investor wit an apetite for risk it may be perfect.

    During previous boom times. rental yield was only aorund 5-6% I believe.
     
  17. Jaggannath

    Jaggannath Member

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    Probably better off hedging on the copper price than Roxby, at least you can offload the shares more readily.
     
  18. kskyring

    kskyring Member

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    properties costing 440k were leasing for $650 per week in 2010. I think this made the yields around 7.6% during peak. Far from that now though.
     
  19. angel investor

    angel investor Member

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    Yields were around high 7's in 2010/11. High 4's to Low 5's now.
     
  20. knightm

    knightm Member

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    Im no minerals expert but my view is that china and india have decades of increased copper consumption ahead. When a country "industrialises" or whatever it is they are doing moving from rice paddies to cities etc, the upfront major development involves steel (and concrete, but thats less scarce) As it embraces technology the copper usage goes up.
     

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