FU­TURES IM­PER­FECT

Min­ing’s most ro­bust per­former, BHP Bil­li­ton, will find the go­ing tough now that oil and iron ore de­mand has re­ally tanked

Financial Mail - Investors Monthly - - Contents - RON DERBY

Ron Derby col­umn

The sim­ple an­swer to where to place your in­vest­ment in a re­sources world for an ex­tended pe­riod or, more specif­i­cally, over the past six years, has been the be­he­moth that is BHP Bil­li­ton. It’s not such a sure bet any more though, and in fact Gold Fields might be on a bet­ter wicket if gold finds a base and soon.

The one clear ad­van­tage that BHP Bil­li­ton, the world’s big­gest min­ing company, had over ev­ery other sin­gle miner in the world was its ex­po­sure to oil.

Com­bine that with its iron ore as­sets, a re­source that has up un­til re­cently held up much bet­ter than most other com­modi­ties, then any in­vestor with a pen­chant for min­ers would be ad­vised to keep Bil­li­ton as their num­ber one pick.

But cir­cum­stances for the Aus­tralian-based miner are chang­ing fast. Oil has moved into bear mar­ket ter­ri­tory, mean­ing a slump of more than 20% in a month be­cause of a surge in shale drilling that has lifted US out­put to a three-decade high, as well as slow­ing growth in global de­mand.

Iron ore hasn’t found it any eas­ier this year be­cause of slow­ing steel de­mand from China, which buys 67% of the world’s seaborne ore, and an over­sup­ply prob­lem.

Since the 2008 global slow­down when all of its smaller ri­vals such as An­glo Amer­i­can took strain as plat­inum and other com­mod­ity prices came un­der pres­sure, Bil­li­ton stood out as the only play in re­sources com­pa­nies, along with Glen­core Xs­trata. It now seems that the miner is af­flicted in the same way as its smaller ri­vals.

In its 2010 an­nual re­sults, pe­tro­leum prod­ucts made up 26% of Bil­li­ton’s earn­ings be­fore in­ter­est, taxes, de­pre­ci­a­tion and amor­ti­sa­tion, on par with iron ore’s con­tri­bu­tion and above that of coal, ac­cord­ing to Bloomberg data. Fast for­ward to this year’s full-year fig­ures: its fuel business makes up 30%, sec­ond to iron ore, which makes up 42%.

Be­tween them, iron ore and oil now make up more than 70% of earn­ings. Given the prospects for both com­modi­ties in the short to medium term, that doesn’t sound too strong and di­verse a port­fo­lio to me. Bil­li­ton is 11% weaker this year.

It’s a rather sim­i­lar tale for Sa­sol, whose in­vestors have long ben­e­fited from that stock’s di­rect cor­re­la­tion with the oil price. Over the past two months, to Novem­ber 14, the share has slumped over 16%.

With the light dim­ming on the two out­stand­ing stars among the re­source coun­ters, there are few places to go for in­vestors in min­ing com­pa­nies, let alone any sin­gle com­mod­ity.

An in­dex of the top-10 re­source stocks on the JSE is down over 7% from the be­gin­ning of the year to Novem­ber 14, with

Cir­cum­stances for Aus­tralian-based miner are chang­ing fast

seven com­pa­nies on that list in neg­a­tive ter­ri­tory. With oil only en­ter­ing bear ter­ri­tory last month, it’s not sur­pris­ing that Sa­sol is in pos­i­tive ter­ri­tory, but it is only 0.6% firmer.

An­glo Amer­i­can is slightly stronger for the year as in­vestors await some cor­po­rate ac­tiv­ity at the nearly 100-year-old miner as it aims to not only re­duce its plat­inum ex­po­sure through as­set sales but re­view its en­tire port­fo­lio. Of the 69 as­sets held by the di­ver­si­fied miner, its CEO said ear­lier this year that 31 were de­liv­er­ing just 2% of earn­ings be­fore in­ter­est and tax.

The strong­est per­former of the JSE’s top-10 re­source shares is the of­ten crit­i­cised Gold Fields, which has bet its en­tire fu­ture on its highly mech­a­nised South Deep op­er­a­tion. Gain­ing just un­der 25%, in­vestors seem to now be­lieve that the miner may fi­nally meet its own pro­duc­tion tar­gets and that it will be able to avoid a Se­cu­ri­ties & Ex­change Com­mis­sion penalty over its black eco­nomic em­pow­er­ment.

If CEO Nick Hol­land and his team can start to de­liver on the South Deep prom­ise and gold finds a base, the miner could do well in an in­dus­try long de­scribed as be­ing in its sun­set.

Sibanye Gold, which swal­lowed the rest of the South African as­sets that Gold Fields didn’t want, has re­mained a stel­lar per­former this year and its 51% share ap­pre­ci­a­tion makes it the best-per­form­ing miner so far. One feels that Neal Frone­man is go­ing to have to un­der­take some cor­po­rate ac­tiv­ity with ei­ther An­glo Amer­i­can Plat­inum or AngloGold Ashanti to keep in­vestors happy.

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