Min­ing’s first signs of re­cov­ery? Opin­ions may dif­fer on the rea­sons be­hind the min­ing in­dus­try rally, but con­sen­sus is that things are look­ing a lot bet­ter than they did a year ago.

Finweek English Edition - - THE WEEK - Ed­i­to­rial@fin­week.co.za

iper­hapst’s a sign of the con­fused state of the min­ing mar­ket that two prom­i­nent bro­ker­ages don’t agree on the mean­ing of the re­cov­ery in min­ing eq­ui­ties dur­ing the first quar­ter, which saw An­glo Amer­i­can and Glen­core gain 25% and 66% re­spec­tively.

In a note wit­tily ti­tled We in­ter­rupt this rally to bring you... fun­da­men­tals, Deutsche Bank said the rerat­ing in min­ing shares this year re­flected a ro­ta­tion by in­vestors into sec­tors that ben­e­fit­ted from eco­nomic turns such as the weaker dol­lar.

“The rally to date re­flects a ro­ta­tion into sec­tors ben­e­fit­ting from a weaker US dol­lar, Chi­nese stim­u­lus and the oil price re­bound more than it re­flects the slowly im­prov­ing fun­da­men­tals – and we think each of these pos­i­tives is now priced in,” it said. The note was dated 22 March.

Paul Gait, an an­a­lyst for Bern­stein, how­ever, is more pos­i­tive. Point­ing to im­prove­ments in the Chi­nese prop­erty mar­ket, and hold­ing the view that 2015 was China’s hard land­ing – not a “new nor­mal” – he be­lieves the in­dus­try is now in the early stages of a re­cov­ery.

“As such, the de­cline in metal de­mand seen in 2015 was not part of the ‘new nor­mal’ but was rather the con­se­quence of de­lib­er­ate pol­icy tight­en­ing de­signed to elim­i­nate some of the ex­cesses of pre­vi­ous pol­icy choices,” said Gait.

Sup­port­ing his con­tention that China’s prop­erty mar­ket is re­cov­er­ing, Gait said that growth in land pur­chased for con­struc­tion has re­bounded to its highest level since the start of 2015. “Area un­der con­struc­tion growth has in­creased to the highest level since April 2015, and floor space of new starts growth has turned (strongly) pos­i­tive for the first time since 2013,” he ex­plained.

There is agree­ment, how­ever, that the min­ing sec­tor is gen­er­ally in a much bet­ter space than a year ago, largely through its own “self-help” mea­sures in­volv­ing cost-cutting and bal­ance sheet ad­just­ments.

The price re­cov­ery in the first quar­ter of most met­als, as well as pro­ducer cur­rency weak­ness – such as the 25% de­cline in the value of the rand against the dol­lar in the past year – has sig­nif­i­cantly boosted free cash flow across the sec­tor. (The rand has strength­ened against the dol­lar this year but only be­cause the cur­rency took an ex­tra­or­di­nary knock in De­cem­ber while Pres­i­dent Ja­cob Zuma reshuf­fled his finance min­is­ters.)

“17 of the 19 com­pa­nies un­der our cov­er­age are now pro­duc­ing free cash flow af­ter div­i­dends in 2017,” said Deutsche Bank. “Free cash flow yields av­er­age 10% for the big four di­ver­si­fied min­ers, and 8.4% for the whole sec­tor next year,” it added. “Gear­ing is also re­duc­ing: we forecast a drop from 26% in 2015 to 22% in 2016 and 16% in 2017.”

The price re­cov­ery in the first quar­ter of most met­als, as well as pro­ducer cur­rency

weak­ness…has sig­nif­i­cantly boosted free cash flow across

the sec­tor.

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