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A brighter outlook for miners

Jan 30, 2018 | 07:00 PM | AMM's London staff, Fastmarkets AMM staff


Regional macroeconomics broadly improved simultaneously in North America, Europe and Asia in the second half of last year, propelling metal and other commodity prices upwards.

Glimmerings of rekindled interest and trust in the mining sector from major institutional investors have emerged, after a prolonged period during which “value destruction” and associated shareholder dismay over the strategies of some of the world’s largest mining houses prevailed – and the availability of debt financing by banks for all but the cream of new mining projects dried up.

Innovative financing models, such as royalty and streaming agreements, picked up some of the slack left by traditional debt and equity finance, but that has left some miners with more fragmentary capital structures.

At the Mines and Money conference held in London at the end of November last year, one speaker recommended that miners “don’t gorge on royalties, debt or equity alone." Since every mine, company and situation is different, it takes a lot of time getting the ratio between them right.

Renewed interest
In December 2015, the collective global mining industry’s market capitalization, based on 2,500 companies tracked quarterly by S&P Global, fell to its lowest point since March 2009. But from a level of under $900 billion just over two years ago, that figure had climbed to not far short of $1,500 billion by September last year.

While there are clear signs of renewed investor interest, caution amongst those who recall the overheated environment of the commodity boom remains high.

Speaking at the Mines and Money event, Evy Hambro, managing director and chief investment officer, BlackRock Natural Resources Equity Team, noted that miners’ past feast of capex had gone to famine, but added that he hoped to see more investment and increased dividends over the next 24 months to restore trust with investors.

Hambro reminded that mining stocks can be a long-term investment, but also that the cyclicality and volatility of the industry means that shareholders need to be compensated by good revenue streams even when mining companies market capitalizations are low.

He added that new mining chiefs “need to attract more capital and spend it wisely.” Investors are looking for greater transparency about company plans and to hear more about actual returns that miners are aiming for. “We want to see growth in the value per share, not just an increase in volume,” he said.

Several speakers at the event made the point that lower levels of production at higher price levels makes for better business sense than maintaining high production levels just because the money is available to do so. Put another way, miners need to ensure that they focus on profitability rather than growth for growth’s sake.

A consensus was apparent that the pressure for mining houses to repair their balance sheets, sometimes being forced to sell assets in the process, has come to an end. George Cheveley, portfolio manager, Investec Asset Management, noted that now, in better times, there really is an opportunity for miners to be more disciplined about their levels of output, unlike the tough period of low metal prices when nobody wanted to be the first to scale back on their production and had to sustain volume to generate cash.

He also said that the quality of material produced and its value in use has grown in importance relative to quantity, notably for iron ore and coking coal.

Optimistic analysts
In these more optimistic times for mining, how are analysts viewing the sector’s prospects? In its January 5, 2018 research report, Jefferies says that its key takeaway is that “the mining sector should benefit from ongoing supply constraints at existing mines, a lack of production growth from new projects, and strong global demand in 2018.”

It points out that valuations are low, balance sheets are strong, and fundamentals are positive. “This is the sweet spot of the cycle, and mining shares should outperform once again in 2018,” Jefferies summarised.

The Royal Bank of Canada’s January 11, 2018 research note on Diversified metals and mining, from RBC’s Tyler Broda, said: “We continue to see long-term investment in the mining sector as attractive.” Both capex and costs expectations are edging up, RBC noted.
“We see the next phase for the sector being the excess cash employed, either through cash returns, or perhaps more constructively, into high-return growth projects,” the note added. RBC’s research also saw M&A at this stage of the cycle as a positive, “assuming prices paid are reasonable.”

Many analysts believe that a brighter global economic picture bodes well for metal markets in 2018, despite a slowdown in China.
Macquarie, for example, in its equities research published on January 8, 2018, Diversified miners – Looking for a third year of outperformance, noted that 2017 was a watershed year, with the global economy finally beginning to shake off the shackles of the financial crisis, nearly 10 years after the fall of Lehman Brothers.

“While risks remain, we think that the healing process is well under way, and that growth will remain solid over the coming year,” stated Macquarie’s research report.

The International Council on Mining & Metals' chief exective officer, Tom Butler, sees the mining industry as “cautiously optimistic” for 2018. He notes that, while the world macroeconomic picture appears rosier, certain risks persist. The accelerating pace of technological change, for example, certainly offers miners opportunities for enhanced operational performance, but also generates more frequent surprises (see international view box).

Changes in national government policies and tax reforms are improving the outlook for mining in the US (see US optimism box).

Long-term outlook
In his presentation at Mines & Money about how the mining industry can build a platform for future growth, Richard Williams, COO, Barrick Gold, said that his company is actively investing in digital and robotic technologies that will drive down the cost per tonne and maximize the margin per tonne mined.

He said that the availability of real-time data from mining operations will provide “radical transparency”. For example, the ability to update mine plans more-or-less in real time, rather than annually, will enable mining to proceed on current rather than outdated information.

Importantly, the ability such technologies will provide to enable investors, governments and communities to watch actual results appear on a screen will enable on-going, real-time performance monitoring and should provide greater trust between all stakeholders in the mining industry.

Fast and accurate provision, processing and analysis of data are also likely to accelerate the permitting process and help to reduce the average of 10-15 years that it can take at present to build a mine after exploration. He suggested that the quality of data and the speed with which systems are upgraded will become new benchmarks for mining headquarters. Innovation investments and competence “could be a very useful benchmark for miners in the future,” he said.



 

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