More than four in every five market listed miners are in a state of ‘marginal or distressed’ financial health, analysts warn.
Holders of mining sector shares should also brace themselves for weak quarterly production updates in April, Lincoln Indicators said.
Given Australia’s share market is dominated by resources stocks, with 700 mining companies and another 250 energy groups, Lincoln Indicators’ 84 per cent figure is significant.
The group, founded by academic and former Olympian Merv Lincoln, assesses a company’s profitability, cashflow, liabilities and assets.
It found just eight per cent of mining companies were financially strong or satisfactory.
Study author Dennis Ng said the purpose of the study was not to detract from the sector, but to warn people against investing in businesses they did not understand.
“It is an area where there is a lot of jargon, very technical information is involved as well and it makes it really difficult for novice investors to enter,” Mr Ng told AAP.
“The overwhelming majority are tiny explorers pretty much set up for a high risk of failure, hence why a large majority are in a marginal and distressed state of financial health.”
Investors often overreacted to drill results and had to educate themselves, he said.
Household names such as BHP Billiton, Rio Tinto and other large stocks were safer bets, but even experienced investors have been caught by surprise by gold major Newcrest Mining’s financial woes, Mr Ng said.
Smaller miners that Lincoln preferred due to superior returns included BC Iron, Sandfire Resources and Mineral Resources.
Lincoln is predicting weak March quarter production reports for BHP Billiton and Fortescue Metals, which could point to weaker full year cashflows and earnings, which will be reported in August.
The impact of disruptions to shipments due to cyclone-induced closures at Port Hedland and industrial disputes – the latest involving tugboats – will be exacerbated by weaker commodity prices.
“What’s going to separate the mice from the men are the changes they have implemented at port and the whole of their operations to cater for wet weather,” Mr Ng said.
February iron ore shipments to China out of Port Hedland fell nine per cent from January.