MINING FINANCE / INVESTMENT

Is now the time to reinvest in mining majors

The almost universal change in the top management of major diversified and gold miners should indicate that a more cautious approach will see greater profits and dividends ahead.

LONDON (Mineweb) - 

Over the years the world’s biggest mining companies have proved to be spectacular investments, but have very much underperformed over the past 4-5 years as corporate dealmaking, largely entered into when the companies’ boards took on CEOs who would embrace big merger deals and huge capital projects when the mining sector seemed to be headed onwards and upwards.

The first real halt to the upwards progression came with the Great Financial Crisis of 2007/8 which decimated the values of many mining sector companies.  While the megaminers, because of their diverse holdings, and continuing strength in the bulk mining sectors like iron ore and coal, may not have suffered as much as most, they have since been caught in a position which does not exactly please their major shareholders and, as a result, we have seen an unprecedented series of major asset write downs and a virtually complete change in top management right across the sector.

In the diversified miners we have seen, or are seeing, new CEOs for BHP, Vale, Rio Tinto, Anglo American and Xstrata – in short the world’s top 5 mining companies by market capitalisation.

Even in more tightly focused sectors like gold – the next biggest sector after the major diversifieds - we are seeing CEO changes at Barrick, Newmont, Kinross, AngloGold Ashanti (although this one could be seen as a promotion with Mark Cutifani moving across to head up AngloGold’s original parent company, Anglo American).

Again the CEO changes are accompanied by huge write downs and the curtailment of many enormously expensive capital projects.

But what this means for the investor is that there will likely be something of change in policies at the top to a more cautious approach.

The new CEOs are almost certainly being tasked with what might be considered as introducing tighter financial constraints, both in terms of costly capital projects and big mergers.

One suspects that given the state of the junior markets they will be looking at picking up potentially large-scale junior exploration prospects – indeed may even look at absorbing some juniors in relatively low cost acquisitions to take on not only the projects, but the exploration expertise that goes with them.

If this does indeed prove to be the case then the mining majors could be set for a great period of consolidation, cost cutting and subsequent organic growth without the proposed mega deals and ever escalating enormous, but perhaps marginal, capital intensive mining projects.  The effects on the bottom line and dividends could thus be extremely positive for the investor and set the mining majors back on track to be extremely worthwhile investments for those who do not want to dabble in more risky asset classes.

Metal and mineral prices seem to be stabilising at decent levels (gold being seen, perhaps unfairly, as an exception, but even here downside risk on the metal price would seem to be pretty limited given the ever growing real cost of production) which should bode well for those who are in the large scale mining business, as the majors are.

Now the really poor investments and projects have been written down in the books, the mining companies will effectively be starting afresh with what could be seen as a clean slate of profitable projects.  True there will be pressures to build some major new mines, and perhaps take on companies which fit into their long term plan, but these will be analysed certainly much more cautiously and it is unlikely inflated prices will be paid for acquisitions, nor a go ahead given for projects which, on close examination, look to be at best marginal once capital costs are taken into account too.

This applies equally to the major gold miners – and ensuing caution may well have an effect on projected global gold output with some big projects already put on the back burner.  The emphasis will be on profitability – and hopefully on building dividends too.  Now may just prove to be a great time to get back into the majors.