Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
(Bloomberg) — The world’s mining sector is firing on all cylinders again, and one of it’s biggest investors can’t wait to get paid.
After five years of under-performance, a combination of synchronous global growth and under-investment in new supply has driven up commodity prices, increasing cash flow and profit margins for the world’s biggest mining companies, according to BlackRock Inc.’s Evy Hambro.
“When those things converge you get a pretty explosive price response, and that’s what we’ve seen,” Hambro, who manages BlackRock’s $6.4 billion World Mining Fund, said in a Bloomberg TV interview on Thursday. “Margins and cash flows for the sector are going to continue to be very robust, and we are really looking forward to getting rewarded for our patience with the companies handing back cash to us.”
Mining companies were forced to shed assets to cut debt and reassure investors during a 2015 collapse in commodity prices that threatened the survival of some of the biggest names in the industry. The slump wiped out more than $1.4 trillion of shareholder value and revealed years of profligate spending by mining executives on ambitious projects to feed inflated forecasts for Chinese demand.
The slump wiped out more than $1.4 trillion of shareholder value and revealed years of profligate spending by mining executives
“A lot of investors were really badly burned, ourselves included,” Hambro said. His fund posted negative returns for five years from 2011, losing 41 percent of its value in 2015 as mining stocks plummeted. “That takes time for people to forget and to trust the management teams not to repeat the same mistakes,” he said.
Growth has returned for miners and BlackRock in the last two years. The FTSE 350 Mining Index is up more than 200 percent in the last two years, while Hambro’s fund made returns of 31 percent last year, compared with an average 15 percent among its peers, according to data compiled by Bloomberg.
With many miners having paid down debt, the focus should be on returning cash to shareholders, according to Hambro. Companies need to be disciplined about how they allocate capital and only invest in project development or acquisitions when they can show investors a return on investment at “reasonable” commodity prices.
If they do that, more investors will return, he said. “The discount that the sector is trading at relative to the historic multiples is a reflection of the underweight that most investors have to this sector.”
With commodities including copper, zinc, nickel, iron ore and thermal coal all rallying, those investors might not want to wait too long.
“The margins at these prices are enormous and they are not reflected in today’s valuations,” he said. “That is the arbitrage opportunity in the market.”
Story by Thomas Wilson, Anna Edwards, and Manus Cranny.
