Don’t panic, it’s just the mining cycle

[miningmx.com] – “IT’S not the end of the world, it’s a mining cycle’. So said analysts of BMO Capital Markets in a recent note that though it sought to soothe client fears, still warned of pressure in the industry over the medium-term.

It’s true: times are hard for mining investors. The UK’s mining sector is worth £100bn less than a year ago while the major mining firms are shedding assets in short order. The sell down led another brokerage, the UK-based SP Angel, to declare it the “great mining giveaway’.

“Assets come with larger company due diligence, substantial past investment, good quality geology and past technical support,’ it said in typical British sarkiness. (BHP Billiton has announced plans to sell about $25bn worth of assets while Rio Tinto has put $10bn on the block.)

It’s exactly why Mick Davis decided not to serve out his six months as interim CEO of the newly created Glencore Xstrata. Much has been made of how Davis, and his school chum, Ivan Glasenberg, of Glencore fell out over the $30bn merger, Glencore Xstrata.

The fact is, however, that Davis’s departure tells us more about the mining cycle than his friendships. In 2002, Davis bought unloved coal assets out of Glencore for $2.5bn in a transaction that formed the basis of Xstrata. History is repeating itself.

“Many of these assets are of good fundamental quality, but may have been overlooked by being non-core or too small for proper attention,’ said SP Angel of assets the majors are hoping to sell. “The incorporation of these assets into new and existing smaller mining companies should create new opportunity for skilled and independent miners,’ it added.

That’s why Davis has retained the services of Goldman Sachs, believed to be in order to establish a mining fund. At no other time would so many assets become available for such good value.

It’s handy to view mining shares in the same way, although BMO Capital Markets noted that investors ought to consider a flight to quality. Sadly, it said the JSE’s bellwether, Anglo American, was a high risk share that should be avoided!

A study produced by UK-listed engineering group, Fenner plc, highlights how the mining cycle tends to work. According to Numis, another UK broker, the mining world is currently at stage one with falling commodity prices placing pressure on capital projects, as well as operating capex.

“Even a modest decline in GDP in industrial and manufacturing countries can often lead to double-digit changes in industrial metal demand,’ said Numis.

Fenner said it wasn’t concerned about the state of the mining industry, and that it views this as part of the normal mining cycle, a view supported by Numis.

It’s also borne out by the actions of the industry’s shape shifters of which Davis is one. Robert Friedland is another.

The Canadian entrepreneur last year listed his IvanPlats on the Toronto Stock Exchange where it will be used to raise the millions of dollars in funds to develop a copper/cobalt mine in the Congo, and a platinum mine in South Africa.

In the shorter term, there will be pain. Impala Platinum has raised the flag on potential retrenchments; Anglo American Platinum is expected to push through with its planned restructuring; Harmony Gold has announced R1.8bn in austerity savings; Gold Fields and AngloGold Ashanti are expected to unveil significant restructuring.

But there are rays of hope. The US economy is slowly recovering, an important element for China which, it is thought, needs a strong consumer economy to keep its GDP growth from staging the kind of surprise that helped knock the gold price in April.

US improvements will lead to improving commodity prices as 2013 progress, said BMO Capital Markets. The extent of this potential demand growth was uncertain, however. “In addition, the anticipation of oversupply for the major metals is likely to suppress commodity prices over the medium term,’ the broker said.