FUTURES IMPERFECT

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

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.