Dam busts for min­ing stocks By ALEX BRUM­MER

Daily Mail - - City & Finance - City Edi­tor

THE City ben­e­fited enor­mously when the UK be­came the first choice lo­ca­tion for nat­u­ral re­source stocks. The col­lapse in com­mod­ity prices, which has come with the slow­down in Chi­nese out­put, changed that.

Other risks also have emerged. At Lon­min, deadly strikes at the Marikana plat­inum mines proved as dam­ag­ing as tum­bling prices for the pre­cious metal. At Bumi (re­branded Asia Re­source Min­er­als), de­clin­ing de­mand for coal to­gether with jig­gery-pok­ery in­volv­ing the Bakri fam­ily in In­done­sia cost in­vestors dear. And Glen­core has suf­fered from weigh­ing into the takeover mar­ket just be­fore the nat­u­ral re­source bub­ble burst.

The lat­est min­ing firm to suf­fer slings and ar­rows is BHP Bil­li­ton.

Its shares fell heav­ily af­ter Brazil re­vealed it would be su­ing the group for £3.5bn over the burst­ing of the dam hold­ing back waste wa­ter at its Sa­marco mine.

The tragedy led to the pol­lut­ing of a ma­jor river val­ley and the deaths of at least 13 peo­ple.

BHP faces bills both for a costly clean-up as well as the Brazil­ian govern­ment’s le­gal charges, and, po­ten­tially, class-ac­tion suits by in­vestors and the fam­i­lies of the dead. Brazil is not the United States, so this is not another Deep­wa­ter Hori­zon ac­ci­dent, but the dam col­lapse has the ca­pac­ity for heavy col­lat­eral dam­age.

Chair­man Jac Nasser and chief ex­ec­u­tive An­drew Macken­zie should be gird­ing the com­pany’s loins for the worst.

BP was suf­fi­ciently as­set-rich to be able to sur­vive Deep­wa­ter Hori­zon de­spite £36bn of costs, but it was, at times, touch and go, with the com­pany com­ing close to Chap­ter 11 bank­ruptcy. The im­por­tant les­son of BP, Glen­core et al is that when cri­sis comes along, you have to garner cash re­sources. In BHP’s case, as­set sales will not be a bril­liant idea in that the core iron-ore price is down 40pc.

An im­me­di­ate way of pre­serv­ing cash would be to limit div­i­dend pay­outs, which at £4.3bn in the year end­ing June 30, 2015, dwarf likely prof­its in the cur­rent year.

It is go­ing to be a des­per­ately dis­ap­point­ing pe­riod for in­vestors in emerg­ing mar­ket and in­dex track­ing funds, be­cause of the as­sorted prob­lems of the nat­u­ral re­source com­pa­nies and fall­ing com­mod­ity prices. In­vestors might ask whether it was re­ally so wise for the Lon­don Stock Ex­change and the FTSE 100 to be­come so dom­i­nated by min­ing and oil gi­ants.

Hero to zero

AMONG the walk­ing wounded from the dis­rup­tion in emerg­ing mar­kets is Aberdeen As­set Man­age­ment.

Cash has been flow­ing out of the group’s emerg­ing mar­ket funds at an alarm­ing rate, with a 12.5pc fall in as­sets in the year to Septem­ber when they stood at £283bn, down from £324bn. Just two years ago, Aberdeen’s chief ex­ec­u­tive Martin Gil­bert was be­ing lauded for over­tak­ing Schroders to be­come Bri­tain’s largest in­de­pen­dent fund man­age­ment group.

Now it looks to be in a lonely search for friends.

It is not the first time that Gil­bert has of­fered an easy tar­get for crit­ics. More than a decade ago, in 2002, his ca­reer as a top fund man­ager looked over af­ter seven of his funds were caught up in the split cap­i­tal trusts fi­asco, leav­ing in­vestors de­mand­ing up to £100m in com­pen­sa­tion. He and Aberdeen looked doomed, but set­tled with con­sumers and the reg­u­la­tor and went on to ex­pand ex­po­nen­tially.

So we know he has the sur­vival skills to defy grav­ity.

Gil­bert’s re­sponse to the present em­bar­rass­ment is to say that ‘we just have to wait for emerg­ing mar­kets to come back into fash­ion’.

He is right that the worm will even­tu­ally turn, but it may take some time. The ex­pected De­cem­ber rise in the US in­ter­est rates will be the start of a process which will see ever more liq­uid­ity shaken out of the newly rich economies, sev­eral of which, from Rus­sia to Brazil, are in re­ces­sion.

An es­cape route used by Aber- deen has been to buy into al­ter­na­tive funds such as FLAG Cap­i­tal Man­age­ment so as to of­fer in­vestors other choices. The trou­ble with tak­ing on hedge fund ex­po­sure is that it is much more risky and the high man­age­ment costs can eas­ily erase gains.

That is why some of the large UK pen­sion funds are re­duc­ing hedge fund hold­ings.

There have been re­ports that Gil­bert is look­ing for an es­cape route, per­haps through a takeover. But where have all the buy­ers gone?

Pal­lid pink

THE deed was done in July, much to the sur­prise and con­ster­na­tion of some FT jour­nal­ists.

Now the City’s house pa­per, pub­lished since 1888 and owned by Pearson since 1957, has fallen into the hands of Ja­pan’s Nikkei.

New boss Tsu­neo Kita says the fu­ture of the ti­tle will be ‘global and dig­i­tal’ and prom­ises not to med­dle. The acid test will come if, and when, the next scan­dal hits Ja­pan busi­ness or when FT jour­nal­ists de­cide to re­lent­lessly pur­sue wrong­do­ing in the fi­nan­cial sys­tem that leads back to Tokyo.

Can’t wait.

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