Diversified miners hold the edge

With the fortunes of the mining industry on the up, what opportunities exist to pick up quality assets at decent prices?

Only three years ago the theme was distinctly one of selling distressed assets and mining majors trying to figure what to do with underperforming assets.

Anglo American, for instance, announced a halt to its asset disposal strategy last February , removing some assets off the table that it had initially intended selling. The turnaround was not only due to the steady improvement in commodity prices — it had exceeded its debt reduction targets and improved business performance.

“These mining companies are going to have massive earnings with these current commodity prices coupled with all that cost cutting they did from 2014 through 2016. That is benefiting them now,” says Peter Major, Director: Mining at Cadiz Corporate Solutions.

“Anglo has been diversifying out of SA since the 1990s. They’re not going to sell anything now at fire-sale prices. They are going to maximise the money they get from existing assets. But they’re not putting any new money in, except maybe De Beers’ Venetia Diamond Mine.”

These dynamics will certainly influence any talk of deals by investors hoping to get in on the commodities bull run. Mining companies that are not diversified will struggle to attract buyers as easily.

Major points out that the choice of commodity also plays a significant part in miners’ attractiveness. Platinum group metals, for example, are unlikely to climb much higher and that “no boom” in the gold price is what is now reflected in miners’ share prices.

“I think they are in a more precarious position than people realise. It used to be that if the gold price goes up, the gold shares go up as well. Now people trust the gold price and definitely not our gold producers because they know they’re under siege from a multitude of directions.”

While there might be fewer great deals available than two or three years ago, it is conceivable we could see new interest from investors attracted by a more accommodating regulatory regime — if that somehow transpires under Cyril Ramaphosa.

Only time will tell how that all plays out in the coming year.