[miningmx.com] – PROFESSIONAL investors are turning the finger of blame on mining company management for fouling up the commodities market which has become flooded with $213bn in net debt during the last five years from just $4bn between 2007 and 2010.
“The issue in [mining] companies is that operational people are on the boards who are not skilled in capital allocation,” said Piet Viljoen, a partner in asset management firm Re:CM. He believed managers, and even investors, were motivated by short-term factors when, in fact, mines takes years to build.
“Managers are incentivised to get the share price up and they are motivated by fund managers and a banker who just wants to do a deal. The boards should check this, but boards are just rubber-stamping,” he said.
According to a report by PwC, an auditing firm, skills represented on boards are, however, mostly drawn from the bean-counting fraternity.
In a survey of all JSE-listed mining companies with a market capitalisation of over R200m, and where most operations were in Africa (which discounts BHP Billiton, Glencore and South32), PwC found that 37% of all company boards consisted of accountants.
Engineers and geologists – loosely counted as “operational people’ referred to by Viljoen – constituted 22% of the total. Lawyers comprised 11% of all mining company boards whilst a worryingly large and unspecified “other’ nomenclature represented 30% of all boards.
Nonetheless, investors were steadfast in their criticism of the executive class.
According to Sandy McGregor, a fund manager for Allan Gray, it was the geologist Cynthia Carroll who committed the most heinous investment of the five-year period of capital misallocation in the mining sector. “I would choose Minas Rio as the most misguided investment,” he said.
This is the iron ore mine built by Anglo American in the Brazilian interior. The UK group wrote off its investment in Minas Rio by $4.96bn in 2012 and again, earlier this year, for an additional $3.9bn.
Said McGregor: “If they (Anglo) had never done this they would have had a balance sheet that would be debt-free and be in a very strong position.
“What’s interesting is that people in the market said it was stupidity. It’s quite astonishing how companies lose sense of the real world outside themselves. Judgement is more than just a spread-sheet,” he said.
It’s for this reason, that investors are supporting a remuneration policy that partly rewards executives only after the mine is completed, even if they have left the company.
“Only shareholders suffer,” said Viljoen. “Cynthia Carroll is a lot better off than she was 15 years ago, but the Anglo share price is lower now than when she started,” he added. Carroll, now a consultant to India’s Vedanta Resources, was appointed CEO of Anglo in October 2006.
McGregor believes there’s more pain to come for the mining sector: “We’ve still got bankruptcies to come”. However, his gloom is not a universally-held view.
“Companies go bankrupt but industries don’t,” said Henk Groenewald, an asset manager for Coronation Fund Managers. “I still think there will be a mining sector in 10 years and I think now is a good time to start to buy some companies,” he said, adding that platinum group metal, manganese and chrome producers were worth assessing.
“We’ve been through a terrible time for the last two years, but now we’re looking for opportunities,” said Fidelis Madavo, head of the mining unit at the Public Investment Corporation, the state-owned asset management firm.
