Dam busts for mining stocks By ALEX BRUMMER
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?
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.