Investment in the mining industry will remain bleak for at
least the next twelve months and probably more, attendees of
this year’s Mines and Money London
conference glumly conceded this week.
Low mineral prices, overstocked inventories and a general
distrust of the health of mining companies and their assets
continue to undermine sentiment in the sector, but most
industry commentators are confident that what has come down,
must go up again at some point.
|Attendees at Mines and Money '14 in
London were told the mining investment situation would
remain temporarily bleak.
As usual, the focus at the 2014 event was split between the
prospects for non-correlated assets such as gold and
industrials metals and minerals such as iron ore, copper,
lithium and graphite.
Influenced by different macro-factors, both sides of the
industry are united by the need to cut costs, which were
inflated by bullish commitments during the high times of the
commodities supercycle, and the difficulty of raising fresh
capital to develop new and existing projects from the pockets
of wary investors.
But mining companies were warned that they need to take
responsibility for past mistakes and illustrate a proactive
approach to spending discipline and reforming business models
in order to win back investor confidence, rather than blaming
the wider economic climate.
"You can’t rest on a compelling economic
backdrop to justify [poor shareholder] returns," Joe Wickwire,
portfolio manager at Fidelity Investment Management, told
He said that many investors no longer believe in
"China’s growth story", but that this negative
sentiment has already been priced into the market, along with
the prospect of higher interest rates that will curtail
spending on large infrastructure projects and concurrent raw
"Things are being looked at from a glass-half-empty
standpoint," he said, explaining that this was keeping
confidence in commodities low for now but would theoretically
prevent a larger crash in the future.
Dan Oliver, founder of New York-based Myrmikan Capital, took
a more bearish view of the impact slowing economic growth in
China will have on mineral prices.
"A rising commodity price forgives a lot of mistakes, but
the China bubble is the elephant in the room – when it
bursts, prices will go even lower," he warned.
According to Joe Foster, portfolio manager at Lombard Odier
World Gold Expertise Fund, both bullish and bearish investors
are always looking forward to the next leg of the commodities
cycle and will seek to back mining projects that are production
or construction-ready in order to maximise benefits from
anticipated growth in demand.
"They are looking for projects that are about to enter the
pipeline and can catch the upswing (…) and have the
potential to be scaled up," he said.
Companies with large capex commitments and lengthy
development timelines are unlikely to tempt investors, Foster
said, hinting that this was a sobering truth for companies that
had commenced development projects at the wrong time in the
As for those companies at the mid-development stage saddled
with heavy debt commitments, speakers at Mines and Money said
that many miners had found themselves in limbo, unable to raise
the finance needed to take projects forward while
simultaneously burning through cash reserves just to stand
Mark Tyler, senior investment banker at Nedbank Capital,
said that contrary to widespread misconceptions, lenders were
not in the business of offering punitive financial deals that
would cause mining projects to fail when the going gets
"Lenders would rather get their money back than have their
pound of flesh," he said, although he admitted that
mismanagement of funds often leaves banks with no choice but to
call in debts and take over assets when projects run into
Getting back on track
One notable omission from this year’s
conference was the willingness to put a firm date on the
recovery of the resources sector, although some were brave, or
foolish, enough to suggest that 2016 would see the beginnings
of an upturn.
Others were less sanguine, particularly for industrial
correlated assets, whose fortunes are tied to factors beyond
the control of the mining industry.
"If you’ve been investing in this space in the
last three to four years, your portfolio probably looks like a
train wreck," Chris Berry, founder of the resources investment
advisory firm, House Mountain Partners, said.
"It’s been a rough few years in commodities,
and that’s probably going to continue for the next
few years," he added.
He pointed out that while mineral prices have fallen from
the spikes seen at the beginning of the decade, many are still
high on an historic basis. "The challenge is that costs have
continued to rise while prices have stagnated," he said.
Berry explained that mineral prices face a number of
headwinds, including a strong US dollar, weakness in key
markets like the Eurozone and slowing growth in China.
"China is slowing but I don’t think there is
going to be a hard landing – it is my opinion that it
will be a far more managed and nuanced story than we have seen
in the past," he said.
The "good news", according to Berry, is that the current
malaise, while painful, is only temporary. "When the various
excesses are worked through, be they in inventories, or labour,
or whatever, things will start to pick up," he said.
Berry urged resources investors to take a leaf out of
Silicon Valley’s book and look for "disruptors"
linked to new technologies in the commodities space, such as
the lithium, graphite and rare earths stories behind green
energy and electric vehicles (EVs) and the growth in demand for
oilfield mineral lead by hydraulic fracturing.
Focusing specifically on lithium, Berry told
IM that the outlook for this "speciality
sector" was positive, but that winners and losers would be
determined by companies’ ability to successfully
implement cost-cutting, recovery maximising technologies.
"Look for technologies that can compete at the lowest cost
and exploit inefficiencies in existing practices," he told
For more on this year’s Mines and Money
conference, click on the links below:
Mines and Money
’14: Industry recovery is years, not months,
Mines and Money '14: Junior
miners must abandon erroneous obsession with inflated mineral
Mines and Money
’14: Lithium success will be determined by
Mines and Money
’14: European Lithium targets New Year AIM
Mines and Money
’14: Potash West plans to displace Australian
Mines and Money
’14: DuSolo outlines upgrade