Where to for the bat­tered min­ing sec­tor? While there was an uptick in cer­tain met­als at the be­gin­ning of the year, prices have de­clined and the big min­ers’ mar­ket caps have been fall­ing. What does the future hold for this sec­tor?

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

the lat­est an­nual min­ing survey pro­duced by consulting firm, PwC – Mine2015 – shows just what a kick­ing the world’s min­ing sec­tor has re­ceived. Based on the per­for­mance of the top 40 min­ers by mar­ket value, con­sol­i­dated mar­ket cap­i­tal­i­sa­tions fell for the third con­sec­u­tive year in 2015.

At about $500bn, the com­bined mar­ket caps of the com­pa­nies – con­sist­ing of BHP Bil­li­ton, Glencore and An­glo Amer­i­can, among oth­ers – were at their low­est point since 2004, and a frac­tion of the $1.6tr recorded in 2010, the zenith of the min­eral and met­als super cy­cle.

What’s in­ter­est­ing though is that the com­bined mar­ket caps have in­creased in the first quar­ter of this year to just over $600bn, rais­ing the ques­tion as to whether the com­mod­ity mar­ket has seen the worst of the four-year cor­rec­tion.

An­dries Ros­souw, a part­ner in PwC’s en­ergy and min­ing industry as­sur­ance group, who has co-au­thored Mine in the past, doesn’t think there are fun­da­men­tal rea­sons for be­liev­ing in the re­cov­ery, how­ever.

“I think that the com­mod­ity price up­swing re­flects the spot men­tal­ity of traders,” he told fin­week at the launch of the survey on 7 June. It is the re­stock­ing of Chi­nese buy­ers, and short-cov­er­ing, that has tem­po­rar­ily raised metal prices and the eq­ui­ties have over­re­acted.

“It’s ab­so­lutely ridicu­lous that min­ing stocks ran ahead and while I be­lieve we have hit the bot­tom of the mar­ket this year, there will be some bump­ing along the bot­tom for the fore­see­able future,” he added.

The mes­sage to in­vestors is to be cau­tious with min­ing stocks that have al­ready had a strong run this year, largely ow­ing to the rand-hedge char­ac­ter­is­tics cer­tain gold and plat­inum coun­ters have with pro­duc­tion 100% in SA.

Al­ready, there has been ev­i­dence of a pull-back in com­mod­ity prices dur­ing May, which has recorded the worst per­for­mance for bulk min­er­als and com­modi­ties so far this year.

Cop­per was down 7.3% in the month, as was alu­minium. Nickel re­tracted sharply by 10.8% while zinc was flat and was the best-per­form­ing base metal to date this year. Gold de­clined ahead of a pos­si­ble interest rate hike.

“There has been a trader men­tal­ity in China which has seen ris­ing de­mand and ris­ing stock lev­els [of met­als],” said Tim Clark, an an­a­lyst for Stan­dard Eq­ui­ties. The ques­tion is whether this is linked to short-term fac­tors such as stim­u­lus mea­sures in China.

“Our econ­o­mists be­lieve there is too much debt in China and they think there’ll be a slow­down,” said Clark. “Maybe not the hard land­ing that we have seen pre­vi­ously in China, but there will be de­clines in de­mand.”

Kieran Daly, an an­a­lyst for UBS, also be­lieved China was “pulling levers”, but he thought the super cy­cle had well and truly been con­signed to his­tory, even were In­dia and Africa to set upon their own height­ened lev­els of in­dus­tri­al­i­sa­tion.

“I bat­tle to see an­other sig­nif­i­cant de­mand event like we had in China,” he said. “In­dia as an­other China? That is a very dif­fer­ent propo­si­tion. People talk about Africa, but Africa is a col­lec­tion of dif­fer­ent coun­tries and it’s hard to see a sig­nif­i­cant growth story.”

The mes­sage to in­vestors is to be cau­tious with min­ing stocks that have al­ready had a strong run this year.

An­dries Ros­souw Part­ner in PwC’s en­ergy and min­ing industry as­sur­ance group

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