finweek

Mining’s year of redemption

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The sight of mining companies promising never to commit recent sins again – mostly of over-extending their balance sheets by chasing market share over economic sense – is a slightly comical one. Suitably reprimanded, mining executives are sitting obediently and nodding. 

It’s a theme that has emerged from the Mining Indaba, the Africa-focused resources jamboree that played out again in Cape Town, which was noticeably lacking the much sought-after resource of water.

“We have a responsibility as management and we have to be convinced that what we are doing is something the shareholders can support,” said Norman Mbazima, deputy chairman of Anglo American South Africa in an interview with finweek at the conference.

“We have all taken a knock on the head,” he added in reference to the shrivening years between 2013 and 2015 when mining companies were troubled by high debt levels.

In the case of Anglo, it was forced to more than halve its debt – down to about $6.7bn at its half-year point end June – and most probably much lower by the time it reports its full-year figures later this month. 

This came at a price, however. Tens of thousands of jobs have been removed off Anglo’s payroll as it bid goodbye to 30 or so assets.

The outcome for mining firms is not entirely clear; in fact, the investment community is ambivalent about whether mining companies have done enough to solidify their positions, which is why equity prices continue to lag the prices of the metals they mine and market. 

Anecdotally some are doubtful mining firms have learnt the lessons of the past: “Until the next time” – said a prominent analyst as he leaned into the bar at a conference-related cocktail party. 

While formally Goldman Sachs is a bull on diversified mining companies in particular, it said in a recent report that it was the most bullish on commodities in more than a decade. Provided mining companies stuck to tight capital allocation, and continued to pay fat dividends, the outlook for equities was good. 

“Higher prices should lead to earnings upgrades and greater cash generation which do drive equity valuations,” it said.

This discussion about diversified mining firms – represented on the JSE by the likes of Anglo American, Glencore and BHP – led UK stockbroking firm AB Bernstein to ask whether 2018 might present as a “year of redemption” for the mining firms. 

It set down criteria by which this might be achieved: no ill-advised mergers and acquisitions; no major upward revisions to capital expenditure guidance; major projects delivered sequentially – not in parallel; increased dividends; and game-changing productivity that it said must be identified and delivered. 

Paying out cash was key.

“It is through the dividend policy chosen by the mining industry in aggregate that such a rerating of global mining assets can be achieved – something that is entirely a function of management decision-making,” said Paul Gait, an analyst for Bernstein.

Quite whether it will turn out this way remains to be seen. Mining assets are depleting as soon as the first tonne of ore is extracted, so the potential for cost-effective organic expansion – the type preferred by Glencore’s Ivan Glasenberg – is finite. 

Then there’s the so-called “tourist investors” as described by Evy Hambro.

Speaking at the Mining Indaba, Hambro, who is chief investment officer of natural resources for BlackRock, the world’s largest asset manager, warned against those investment professionals whose want it is to flock to in-the-moment asset classes. 

Such investors typically place pressure on mining company management to grow aggressively because they want to benefit from short-term hype whereas core mining investors have a long-term interest in the industry.

The consensus seems to be diversified mining firms can and will rerate. 

Reports by Macquarie, Goldman Sachs, RBC Capital Markets and Bernstein, seen by finweek, seem to support the investment cases of Anglo American, Glencore and BHP. 

The question is whether the mining sector can really break the habit of a lifetime, and keep within narrowly defined investment borders. 

This article originally appeared in the 15 February edition of finweek. Buy and download the magazine here.

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