Mines and Money ’14: Train wreck portfolios – back on track by 2016?

By Laura Syrett
Published: Friday, 05 December 2014

As this year’s convergence of resource developers and financiers draws to a close, the majority opinion was that a recovery in the mining sector is still some years away.

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.

Mines and mOney outside SOURCE: Siobhan Lismore-Scott 
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 delegates.

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 material demand.

"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.

Production-ready projects

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 cycle.

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 still.

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 tough.

"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 trouble.

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 investors.

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, away

Mines and Money '14: Junior miners must abandon erroneous obsession with inflated mineral prices

Mines and Money ’14: Lithium success will be determined by technology

Mines and Money ’14: European Lithium targets New Year AIM listing 

Mines and Money ’14: Potash West plans to displace Australian fertiliser imports

Mines and Money ’14: DuSolo outlines upgrade plans

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