London Calling asks: who were the real “idiots” in 2014?Published by MAC on 2015-01-11
Source: Nostromo Research
Dear Reader, kindly forgive this resident MAC sage for offering some predictive onions for the New Year.
We'd like to say that 2014 marked the end of mining world as we knew it. In fact, that's almost exactly what we do believe, and judge there's solid evidence for thinking so.
This, even more so following comments made by that egotistical Canadian entrepreneur Robert Friedland during last December's Mines and Money (M&M) hoopla at the Business Design Centre in the London borough of Islington - just a stone's throw from where this article is being written.
Friedland certainly told his captive audience what it wanted to hear: “Anybody who says that the [minerals] super-cycle is over is an idiot – it's just been deferred for a little bit...Miners are actually providing everything you need to change the world and make it better”.
That a singularly daft thing to say! What on earth have metals and mined materials contributed to price-less human values such as poetry, art, dance, faith and courageous endeavour? Without these, what would be the point in building a thousand new steel bridges, chundering out millions of "advanced" mobile devices, or constructing thousands of fresh centres of learning? Not to mention the huge part of metallic output, dedicated to providng the means for wiping out our fellow beings.
Mind you, “Toxic Bob” did pay lip service to what the World Health Organisation now calls the world's largest health risk - urban air pollution. And, of course, he had a ready antidote to hand: expanding the use of auto-mobile “platinum-dependent catalytic converters”. That's a cause to which he's undoubtedly dedicated, his company Ivanhoe having recently opened the potentially massive Platreef mine in South Africa.
Unfortunately, a bare two weeks prior to M&M, local citizens tried blockading the Platreef operations, only to be fired upon by cops with rubber bullets [See: South Africa: Police Fire Rubber Bullets at Ivanhoe Mine Protesters]. Friedland chose not to mention the fact; as this is the season of goodwill, we'll put that down to a mere memory-slip on his part.
His rousing call to arms and optimism was matched only by the foolishness of Clem Sunter. Invited by M&M to fill-in for an absent speaker, the former head of Anglo American's gold and uranium division claimed to have predicted the 9-11 disaster - though admitting he didn't get it “exactly right”. Volunteered Mr Sunter: “If we did, I wouldn't be here. And the Business Design Centre would be in Cuba.”
(Actually, following the recent long-overdue rapprochement between Obama and the Castros, it's not fanciful that, in a decade or so, a version of Islington's venue for mining's mighty and moneyed might be set up in Havana).
What does the future hold?
Now to comments made in December by two doyens of Ernst & Young, one of the world's leading financial services firms.
Lee Downham is E&Y's lead partner for global mining and metals transaction advisory services. He tells us that the “holding pattern”, experienced by the market since the start of 2013, shows no sign of ending.
Downham urges the mining sector to move from the simple growth strategy previously employed, and concentrate on “total shareholder returns” (TSR), by way of putting money in the pockets through increased dividends. Stung by shareholder criticisms, and fears for the future, already BHP Billiton and Rio Tinto have embarked on this.
In fact, only 15% of capital raised by mining companies during the first nine months of last year went towards (as Friedland would have it) providing “everything” required to make the world a “better place”.
“For diversification to improve TSR, the benefits of profit growth and a lower risk profile (sic) must outweigh the reduction in capital available to shareholders” opines Downham. However, mergers and acquisitions had failed to do this, and as a result overall risk was increasing, along with “insufficient profit”.
Mike Elliott, E&Y's global mining and metals leader, joined in with a complementary analyis: “Compared to this time a year ago”, said Elliot in mid-December “share prices are down, margins are tighter and balance sheets are not as healthy.
In the past 12-18 months, mining companies had made some US$20-25 billion cost cuts, with iron ore prices falling 47%, thermal coal 25%, metallurgical coal 16%, and copper 12% during the period.
During this period, according to the economics consultancy, CRU, the mining industry had lost “hundreds of billions [of dollar] in revenue from the fall in commodity prices last year, as it tracked trends in coal, iron ore, phosphate rock, potash and bauxite rock.
Elliott concludes that the market capitalisation of the top ten mining companies dropped by 18% between January and 1 December 2014, and predicts that: “The next wave of mining investments will be so complex and so large, that the question then becomes, if the biggest miners are not permitted to undertake that investment, then who will?”
He partially answered his own question, describing the extent of public opinion garnered by the “anti-coal lobby” as the biggest single shock impacting on the mining sector during the past year. Such pressure, he said, “...potentially changes the economics of energy-intensive projects for mining and metals companies.
“This cyclical price trough is acute because the peak of the super cycle was also acute. The speed with which prices have fallen in the past six months and the likely ongoing price volatility make it incredibly difficult to have a stable business model.
“The risk aversion of the capital markets to the sector was not expected to last as long as it has. The lack of investment in exploration and development will come back to bite and may exacerbate (sic) the peak of the next upswing”.
Further shocks - like those now being sustained in coal and iron markets - may well "bite" other industry sectors in the very near future, to an extent the pundits never predicted.
And decidedly, not that maple-syrup oracle, Mr Robert Friedland.
Sources for this article: Mining Journal 5 December 2014; Mining Journal 19-26 December 2014; Financial Times 13 December 2014
[London Calling is published by Nostromo Research. Opinions expressed in this column are the author's, and do not necessarily represent those of anyone else. Reproduction is welcomed under a Creative Commons Licence]