BHP hop­ing to buck the trend

The Aus­tralia-head­quar­tered min­ing firm is adopt­ing a counter-cycli­cal in­vest­ment method­ol­ogy, which is to in­vest when met­als are not in de­mand. How­ever, stick­ing to this plan in down­turns will take some real de­ter­mi­na­tion.

Finweek English Edition - - News - By David McKay

ask most in­vest­ment pro­fes­sion­als op­er­at­ing in the met­als and min­ing mar­ket, and they will say the world’s min­ing com­pa­nies have tended to go with the flow. When de­mand for met­als is high, they pro­duce more and spend more on dig­ging new holes in the ground. Un­for­tu­nately, by the time new mines are built, the rea­son for build­ing them – the in­creased de­mand – has gone away.

This, in hor­rid, over-sim­plis­tic brevity, is the the­ory of pro-cycli­cal in­vest­ing.

BHP, the Mel­bourne-head­quar­tered min­ing firm, and one of the largest com­pa­nies on the JSE by mar­ket cap­i­tal­i­sa­tion, is en­deav­our­ing to change all of this by adopt­ing a counter-cycli­cal in­vest­ment method­ol­ogy, which is to in­vest when met­als are not in de­mand.

It is not a rad­i­cally new idea in the sec­tor – ac­cord­ing to an­a­lysts, only An­glo Amer­i­can is in­vest­ing enough in new pro­duc­tion to keep met­als sup­ply and de­mand in bal­ance – but it is yet to be ex­e­cuted suc­cess­fully. Ac­cord­ing to BHP data, in a re­cent pre­sen­ta­tion on its spend­ing plans, the Top 40 global min­ing com­pa­nies have in­vested $900bn since 2008.

Of this, $350bn has been re­turned to share­hold­ers, while a fur­ther $250bn has been writ­ten down.

Pro­fes­sional ser­vices group PwC said in its Mine: 2018 report in June that share­holder re­turns had al­most dou­bled to $36bn from $16bn in 2016, and that the out­look based on cur­rent lev­els of per­for­mance sug­gested div­i­dends were likely to reach record highs this year. This is based on its own sur­vey of the Top 40 com­pa­nies.

But it asked if the task of keep­ing re­turns for­ever high was sus­tain­able. “Share­hold­ers who en­dured the boom cy­cles of 2008 and 2012 will be keen to reap the re­wards of their pa­tience now that op­ti­mism and prof­its are back,” said Michal Kotze, Africa util­i­ties, en­ergy and re­sources leader for PwC.

“But the im­me­di­ate temp­ta­tion for larger re­turns – for share­hold­ers or other stake­hold­ers – must also be bal­anced against the on­go­ing need to in­vest for sus­tain­able long-term value,” he added.

Ac­cord­ing to RBC Cap­i­tal Mar­kets, a Cana­dian bank, the no­tion of counter-cycli­cal in­vest­ment is an en­deav­our filled with haz­ards. “There are cer­tain chal­lenges in the de­sire to move to counter-cycli­cal in­vest­ment that are very en­trenched,” said Tyler Broda, an an­a­lyst for the bank.

“In or­der to drive im­proved mul­ti­ples and bet­ter-thanaver­age re­turns, the frame­work will need to be ad­hered to not only through cy­cles but also through man­age­ment teams,” he said. That’s hard to do be­cause it re­quires es­tab­lish­ing a new in­sti­tu­tional DNA; a way of do­ing things not just be­cause it is the idee du jour, but be­cause it is a habit. “The de­sire to coun­ter­cycli­cally in­vest is fine in the­ory, but hav­ing the re­silience to see debt ex­pand in a down­turn, div­i­dends re­duce, and (in the­ory) tem­po­rar­ily lower mul­ti­ples will re­quire some sig­nif­i­cant de­ter­mi­na­tion, es­pe­cially with in­creas­ingly shorter-term in­vest­ment hori­zons from in­vestors,” he said.

At a Gold­man Sachs con­fer­ence in London in Novem­ber, the bank found that min­ing com­pa­nies were highly risk averse to min­ing projects. “The near col­lapse of the sec­tor in 2015 is still rel­a­tively fresh in the minds of both in­vestors and man­age­ment teams, which is driv­ing con­tin­u­ous dis­ci­pline in cap­i­tal al­lo­ca­tion,” it said. And a re­cent dip in the value of min­ing shares al­most across the board has backed up the re­al­i­sa­tion that they can­not lose their fo­cus for a sin­gle sec­ond.

Cap­i­tal that is be­ing spent is pri­ori­tised on brown­fields and de­bot­tle­neck­ing. It added that com­pa­nies at the con­fer­ence were “… in agree­ment that there are no ob­vi­ous multi­bil­lion-dol­lar projects on their radars at the mo­ment, with the list of vi­able projects get­ting smaller and less ex­cit­ing”.

The bank has called the cur­rent mode of min­ing com­pa­nies as hav­ing en­tered “an age of re­straint”. But will the in­vest­ment mar­ket be con­vinced min­ers have met their dam­a­scene mo­ment? Asked by Bloomberg TV whether she be­lieved in min­ing com­pa­nies’ de­sire to show more cau­tion and re­straint in their spend­ing habits, Olivia Markham, co-man­ager of Black­Rock World Min­ing Trust, replied: “I hope so.” Not a re­sponse that in­spired mas­sive trust that the min­ing in­dus­try can exercise re­straint for long. ■ ed­i­to­[email protected]­

The Top 40 global min­ing com­pa­nies have in­vested $900bn since 2008.

BHP’s Olympic Dam mine is a large poly-metal­lic un­der­ground mine in South Aus­tralia, 550km north-west of Ade­laide.

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