[miningmx.com] – LOOK as one may, but it’s hard to find many glimmers of hope in the commodity market and therefore few pointers for investors. The best advice is to steer clear of a sector still in trauma, especially as the tone of many the sell-side analyst notes is of the post-mortem variety.
For instance, picking through the flotsam and jetsom of what is a major commodity crash, Investec Securities pondered the view that the so-called super-cycle from 2000 to 2010 was in fact “… a price upswing” driven by China’s industrialisation.
It may prove to be in hindsight “… part of a normal cycle albeit one that happened to be of unusual magnitude and duration,” the bank said.
“The threat now facing the industry is a prolonged down-cycle caused by falling industry costs and a prolonged period of oversupply, resulting in sustained weakness in commodity prices.”
The weakness has already been fairly sustained.
According to Barclays Capital, the last five years have been the cruellest on mining stocks since a slump in metal prices in 1966, nearly half a decade ago. “Looking forward, it is hard to see what might pull the sector out of its tailspin,” it mused. “A demand shock seems unlikely given the state of China’s economy,” it said.
With things looking so grim, Barclays has downgraded its share earnings outlook for the world’s top four mining companies by 28% on average with Anglo American the hardest hit at -46% followed by Rio Tinto (-32%), BHP Billiton (-31%) and Glencore up slightly by 2%.
The uppishness on Glencore is partly related to its response to investor fears that with $30bn in net debt, the company was over-leveraged at a time when it was best to be less exposed.
It has since announced plans to lower net debt by $10bn – a development that has seen positive responses from Deutsche Bank which said the company’s debt reduction plans were “locked in” and operations “were humming”.
Said JP Morgan: “We retain our neutral recommendation [on Glencore] but believe announced disposals [as part of the net debt reduction plan] will drive positive share performance”.
One of the factors Anglo is likely to be hardest hit is the poor outlook for iron ore, although its suffering on this score is a shared one: according to Barclays, the iron ore sector is responsible for 63% of the entire mining sector’s pre-tax earnings.
Goldman Sachs said in a recent report that Kumba Iron Ore, in which Anglo American has a 70% stake, could face a further battering even though the stock is some 76% weaker year-to-date (at time of writing).
This is owing to continued operational issues at Kumba’s Sishen iron ore mine which will only deliver 31 million tonnes (mt) in 2015 due to a lack of available high quality ore. Kumba is also expected to report higher costs as waste tonnage increases to 230mt from 200mt.
Added to that, the world’s iron ore producers are continually improving their cost controls which puts pressure on the higher cost producers especially as demand declines in China. The outcome is another year of cash burn for Kumba.
“Cash turn will lead to pressure on the balance sheet,” said Goldman Sachs. “We believe that Kumba has limited levers left to combat falling iron ore prices, and any restructuring would likely include lay-off which are historically challenging in South Africa.
“We see cash burn in 2017 leading to increasing pressure on the balance sheet. As such we see very little chance of a dividend being reinstated and we reiterate our sell,” the bank said in a recent note.
